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Looks like “bargain-hunting season” is cancelled this year

First the summer doldrums didn’t happen. Now, during the seasonally weakest months of the year, stock indexes are hitting multiyear
highs and charts of individual company stocks are going hyperbolic! Time out! TSX-Venture Index Chart from.

Normally this time of year, I am surveying a dozen or so flat lined, beaten up stock patterns for the annual “Bargain-Hunting” Issue.
But there are no bargains short of the value plays I have been picking in recent previous issues.

Let’s do a little recap of how the major American and Canadian stock indexes have done YTD (as of Nov 4, 2003, all in round numbers):

Dow: +30%
NASDAQ: +48%
S&P-TSX: +20%
TSX-Ven.: +45%
Gold: +10%
HUI Index: +48%

In short, both the overall markets and the gold sector have been rocketing since April. The recovery began gradually and has accelerated
ever since. Oddly enough, it’s been two of the more speculative sectors, technology and gold mining where the action has been most frenzied. And nowhere is that more evident than by looking at the TSX-Venture Index. Starting in the beginning of October, it’s nearly gone vertical!

Huge liquidity is being created by soaring prices of resource stocks like Ivanhoe Mining and Ivanhoe Energy or anything else Chinarelated
lately. The small cap mining market is in the grips of a minimania where momentum, rather than fundamentals are the name of the game.

This raises all sorts of warning flags I feel I would be remiss not to point out. One of the best lessons on what went right in my investing
experience was sitting tight and NOT deploying cash into the stock market in the months preceding the October 1987 Crash. Waiting for the markets to adjust provided a 23% discount (instead of a haircut) and pretty much immediate gratification after buying into fear. And the charts today look similar to the ones back in the summer of 1987. Markets move up and they move down. Personally, I find the best time to buy aggressively is after cyclical declines, not inclines. And that currently can’t be said of the most recent period.

A second indicator, the Gold price channel, is still much closer to overbought than the oversold buy zone. At this time the price would need to drop closer to $360 to approach the oversold/buy zone.

Another one of my indicators, this one proprietary, is flashing caution. It’s my NSI - newsletter sales indicator. Happily, subscription sales are brisk these days. Sadly however, at least in the past, I have found that when demand for my product peaks, the markets are about to do the same.

This is not to say overbought markets can’t get even more overbought. Nor can I say that gold prices aren’t poised to break $400 anytime now. I see just as we go to print the price is hitting new 7-year highs decidedly above $390 now. “Point and figure” calculations imply a short term target of $420 which should set the gold stocks on once fire again.

What I am saying is that I have less conviction right now because the market’s direction is out of sync with the gold and small cap
seasonal cycles right now. The rising market during these normally quiet times of the year raises an important strategic question for
those of us who trade around the small cap seasonal calendar. That is, is the strength we’re seeing in recent months actually a sign of
positive divergence, indicating an explosive first quarter of 2004 to come? Or is it “robbing from” strength in the first quarter? At this
point I honestly don’t know. One scenario I can envision though, if December is strong, is a frantic New Year that gets ahead of itself and
blows off early, say, by February.

I can tell you that the recent strength in gold prices is not reflecting a surge in physical demand, that in fact physical demand for gold is
declining in price sensitive markets like India. The surge in demand is totally from investment, speculating on higher prices.

But markets don’t make high double-digit gains indefinitely. That being the case, we’re continuing to follow the strategies we’ve
adopted so far this year, with a new twist:

That is, for one, we are continuing to substitute price action for the annual seasonal small-cap cycle as our leading guidepost for how
aggressively to be speculating at any one time. We didn’t sell aggressively by April as we normally would have done since the Gold
price chart channel was telling us the gold sector had actually reached an intermediate bottom and was if anything in the buy zone. Likewise we will not be aggressively buying here as we normally would during this time of year because the gold price channel is closer to
overbought than oversold.

Second, as for the kinds of gold stocks to look at, we’ve had great success with the market leaders such as Newmont (Franco Nevada
actually) Wheaton River and Endeavour Mining Capital and we continue to hold them as core positions until the end of the bull market
or unless they give us a reason to do otherwise. But beginning this year new money is being directed to situations we consider to have
“extreme value”, be it undervalued assets or earnings.

However at this point, anything of any quality has very likely already had a big move (and if not, one has to ask oneself, why not?).
So for that reason, it may be that the biggest speculative gains (apart from major mineral discoveries) going forward now will be found
with NEW situations that haven’t had the opportunity to move yet because they are new IPO’s or RTO’s (Reverse Take-Overs) of recently
cleaned up “shell” companies. We include one such new pick for this issue, a new IPO named Amera Resources on Page 3.

To our anchor of value-oriented positions, just to keep things interesting, we have added and continue to follow just two other extreme Risk/Reward situations; Chuck Fipke’s diamond play and IMA Exploration’s potentially very rich, very large silver discovery in Argentina. Both of these plays are approaching major milestones that could lead to life-altering profit potential (just don’t forget they also both entail significant risk).

In the meantime I urge caution going forward and leave you with a link to an article by Adam Hamilton entitled “Wisdom of Jesse Livermore 6”, which is basically a book review including the best highlights of a one we might all want to considering reading, Reminiscences of a Stock Operator, by Edwin Lefèvre.

From the book:

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine— that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

“The reason is that a man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street, who are not at all in the sucker class, not even in the third grade, nevertheless lose money. The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.”

Adam’s article, which I think is definitely worth a read, is here: http://www.zealllc.com/2003/jesse06.htm

I can’t guarantee these particular lessons necessarily apply today, but I wouldn’t be surprised if they did. At least sooner or later. In the meantime, let us enjoy the ride, but not get caught up in it.

 

Copyright 2003