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Timing Profit Taking Corrections

By Roger Wiegand             Printer Friendly Version
May 18, 2006

“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 regularity.

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 trading.

This time it’s different
If we are comparing 1980 and 2006, yes, this time it is different. –Traderrog

“Time 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 computing power.

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 societies.

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 correction.

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.