Timing Profit Taking Corrections
“Whenever you find
yourself on the side of the majority,
it is time to reform.” Mark Twain 1835-1910
Investors and traders would prefer to buy something
and have it rally forever. This simply cannot happen as human
nature says take profits when you see them. Further, outside
mitigating circumstances often thrust themselves onto markets
disrupting things prematurely. These confusing market moving
events can make big trouble as large accounts are quicker
to invest and slower to exit. Some large investors are critical
of little traders as their perspectives do not match. The
big boys don’t need the cash and are in for the long
pull with a primary objective of retaining
capital and protecting it as opposed to the secondary objective
of earning more. The smaller traders are striving and
straining to maximize earnings so they are busy swing trading,
day trading and holding only a partial core position for the
longer term in favorite quality stocks. Both sides say they
are right with others being wrong. In reality, both
sides are right but only at certain times. One dyed-in-the-wool
buy–and-hold-forever investor scoffed at this when discussing
timing ideas with a Chicago screen trader. “He said,
you couldn’t possibly make money doing that.”
The screen trader laughed and replied, “Want to see
my fleet of Mercedes cars in my new mansion garage?”
We have a reverent adulation for the achievements
of Warren Buffet who is now 75 years old and still investing.
However, in our view, trading and investing circumstances
are radically changed from Warren’s lengthly adult market
experience. The difference now is the United States of America
is no longer as market friendly and lightening fast computers
have the trading world wired for incredible speed; not only
in the States but in all advanced investing societies.
We understand the values of compound interest,
and allowing stocks enough breathing room and time to perform.
But now, we compete with 8,000 hedge
funds holding billions of dollars, trading whole groups of
markets driven by technical analysis with trading decisions
left to this program directed electronic monster. Some
of these funds are trading off the 20, 50, and 200 day moving
averages with additional elegant programming providing optional
adjustments based upon today’s circumstances. We think
that if you are a smallish trader buy and hold will not work
any more. Trading metals on two major market swings annually
would be a big improvement. Trading four to six of them might
be even better depending upon what Mr. Market offers us.
What is so amazing to us is the huge uproar
when markets suddenly shift. Smart analysts have been warning
for weeks as to when a metals and stocks correction might
arrive. The power of New York investing psychology is so deeply
imbedded into the psyche of the herd they still cannot believe
a large stock market reversal when it strikes. While the charts
differ from year-to-year, the major turning points in these
markets usually surface near similar dates with historical
Trader Tracks has written openly and warned
of key dates for months. The “Sell in May and go away,”
slogan is quite familiar to traders. Yet, when it arrives
they have a serious problem dealing with it. I spoke with
a semi-retired broker friend now trading a 7 figure account
only for himself. He made a pile in the massive bull rally
leading up to the end in 2000 and escaped with most of it
intact. Now, however, for some reason he cannot make himself
take profits nor get out of the way of selling stocks. He
works very hard at putting on too many trades and not following
up with good account management. Worse, he has had some excellent
ideas leading to large gains then sat doing nothing watching
them evaporate in a flash.
We have offered him several successful ideas
most of which were never implemented as he is too busy on
other matters. To make things worse, he is receiving bad service
from his brokers who are not executing properly and meddling
in his trading ideas when they should be following instructions.
Recently, one broker talked him out of taking major profits
on a big trade and he subsequently lost it all. I have never
before witnessed a problem like this one. To me is seems easier
to do things with proper rules, risk guidance and account
management. This is a lesson learned for all of us; even those
reading of these things and not implementing unworkable ideas.
Good do’s and don’t are quite valuable in all
This time it’s different
If we are comparing 1980 and 2006, yes, this time it is different.
has a notorious way of making sure
everything doesn’t happen at once.” –Anonymous
The primary difference between
1980 and 2006 is today’s legendary abuse of currencies,
debt, credit, mortgages, bonds, and
Treasury-Central Bank-Government suppression of certain markets
in favor of promoting other markets. Further, all of this
is delivered several times faster by courtesy of magnificent
Other differences include the spread of capitalism
even to communist countries like Russia and China. These nations
have an odd hybrid system of command dictatorship operating
within semi-free economies. They have finally learned that
business makes the world go ‘round and are anxious to
be a part of it. Both China and Russia have also discovered
the fine art of suckering in western investments to capitalize
their domestic projects. These new and growing semi-capitalists
are draining global billions to build themselves into modern
Vise of Inflation Grips Tighter
Traders couldn’t make money in the mutual
funds so they moved cash to the hedge funds operating with
fewer restrictions. Problem now is the hedgies have so much
cash they cannot find enough good places to put it to please
fund investors. Some of the hedge funds are in gold but even
of those who are, barely a few have stuck a toe into the golden
pond. So far, gold investments for hedge funds are so tiny,
measurement is difficult. Watch what happens when their metals
buying begins in earnest.
On May 17, 2006, the latest CPI was reported
showing ostensibly, the real inflation rate and the Dow dropped
214 points for a wake-up call. As the day wore on, markets
continued to sink. There is only one way to describe these
stealth inflationary pressures and that is they are incendiary.
Good traders will be diligent to control this risk.
The dilution of currencies, specifically the
U.S. Dollar, along with those of other western nations is
providing buying pressures for gold as an anti-inflationary
safety valve. Gold is becoming a currency unto itself. In
the modern era, currencies would ebb and flow with one or
a few selling while being offset by rallies in others. Now,
however, the major currencies including Yen, Dollar, Euro,
Swiss, and Pound are all in a dilutive, over-printed state.
At this date, some appear better than others. However, eventually,
real buying power will decline in these premium currencies
as values match and mismatch among the group. Central banks
are the great monetary adjusters as they raise rates, and
all nations strain to compete with cheaper money. These currency
problems have the potential to be, shall we say, history making
in their performance.
China, India, Japan and in greater amounts the
Middle Eastern oil barons, are all prolific gold buyers. Several
are trying to hide it and some are using it for political
leverage when possible. We heard of a report last week which
was not verifiable, that only about 1% of the general markets
buying public is invested in gold or gold stocks. We know
the number is low but cannot be certain it is that low at
this time. Nevertheless, investment reports and market-chart
behavior indicate most retail street investors are thinking
buy and hold forever while watching their mutual funds go
into the dumpster.
Central banks were dumping gold with both hands
at $250-$450 and now are closet buyers. Those with the opportunity
to sell more under the international gold selling agreements
are holding back not selling their quotas or prearranged amounts.
They have watched Gordon Brown’s gold selling disaster
in the U.K. and prefer not to be caught with the massive losses
for which he was directly responsible.
There remain some large gold miners with hedges
on the books. Our last report indicated 50mm ounces are still
hedged and another newer report says 48mm is hedged. We saw
a third report showing a list of amounts to be reset, removing
existing hedges on one major gold corporation. Their schedule
called for hedge buyouts of approximately three million ounces
for 2006. The size of their remaining hedge is much larger
and will be chewing on their bottom line for years. With the
rapid rise of gold ahead, in our view, this hedge could ruin
a certain large gold company.
Gold and silver stocks have normal May
We find new strong support for the precious
metals stocks group at 140 on the XAU. Considering cycles
and time, June 1 is typically the beginning of our next gold
stocks rally. The last week of May and first two days of June
fall into one week which is a combination of month ending
and a holiday. That week for traders ought to be quiet with
little activity except for holiday and month end adjustments.
Most traders will enter that week going flat or adjusting
new positions for June trading. Expectations are for a new
metals rally to begin after that week on June 5.
Gold completed an A
corrective wave down and remains in a B corrective wave up.
Forthcoming and last C wave of this group (down) should find
support at 680-690. If we slip below 675, expect support at
640 which is a major price support level with gold’s
price near the 20 day moving average.
Notice the PMO (Price Momentum Oscillator)
on the bottom of this chart. It shows our May price dip last
year followed by a steady rise from June 1 with peaks in October,
and December of 2005 and a last higher peak in February of
2006. This is a traditional precious metals trading pattern
which is expected to repeat for 2006.
The U.S. Dollar and 30-year bonds should
recover this spring and summer followed by an August selling
pattern continuing through the fall of 2006. Gold has enjoyed
both a later spring and very mild selling correction. This
market is telling us it does not want to sell
and seems to be breezing through the normal May sell-off period.
There is time for more selling and it could occur with a price
drop to 640-620 or possibly even 585. In our view, we expect
the new price floor to be 640 at its worst; which is quite
mild when we review the impact of our latest rally. In comparing
precious metals stock options far into fall and into 2007-2008,
traders (option sellers) are asking much higher prices for
similar risk compared with the 2005-2006 gold rally. These
are very sharp traders with a keen understanding of risk-reward.
Follow their lead for price expectations. Usually, they are
correct. We should expect much higher gold prices and companion
volatility for 2006.