Trading in a sideways market is not an easy task – especially in this market.
Over the past year, we have seen strong runs followed immediately by strong pullbacks. This past week was no exception as the market took us for a wild ride. This makes trading difficult.
Trading in this market should be reserved for sophisticated day traders who not only have a large piggy bank, but a wealth of time on their hands.
Most of us don’t fit in that category. Most of us have day jobs. That’s why we prefer to invest, rather than trade.
Sound confusing? Let us explain.
Stock prices generally do not reflect what a company is really worth because they can fluctuate every minute of every day. In most cases, a company’s actual outlook or performance doesn’t fluctuate the same way.
The actual trading of stock, which determines a company’s worth, is based on investor expectation, and more importantly, psychological momentum – especially in the junior market. It’s incredible just how big of an impact a small article published from a respected news source can have on the markets.
But news happens and changes every minute of every day – just like stock prices. However, a corporation’s progression and corporate value generally doesn’t fluctuate as fast.
When you trade, you’re making a bet on the perception and psychological emotions of investors. When you invest, you’re making a bet on a company’s value and potential.
Traders need to constantly act on daily price fluctuations much more than an investor does.
In our last issue, _Actions Speak Louder Than Words_, we talked about the strong sell off in commodities-related stocks and the reasons why we believe that this recent sell off is more of a consolidation period, rather than a bear market. When this consolidation period ends, we expect to see a continued bull market for the remainder of 2011.
However, this consolidation ( _as mentioned in Actions Speak Louder Than Words_) may take a few months before we see the bottom.
The trading activity this past week added more proof to our consolidation theory, as we saw a strong increase in buying Wednesday leading to a significant rise in the commodities-weighted TSX and TSX Venture exchanges. This was followed by another down day on Thursday, and back up on Friday (TSX Venture).
If you’re going to trade this market, it’s important to understand it.
When choosing the right stock, it’s important to know how the sector is performing, how its peers are performing relative to itself, and how the price and volumes are reacting. Knowing how the price and volumes are reacting is important because this can give you an idea of what the smart money is doing.
We saw a lot of smart money loading up on shares this week as scared traders sold cheap stock to them.
In this market, it’s more important to see what the buyers and sellers are doing, rather than what the company is.
Over the past month, we’ve seen gold producers increase production, yet their share price continues to fall. We’ve seen juniors make significant upgrades to their resource calculations yet continue to fall in share price. That doesn’t mean the company is doing bad. When this market turns around and we find a bottom, many of these companies could see a significant climb.
But how do we know where the bottom is?
The bad news is that it’s almost impossible to find an exact bottom. The good news is, after a stock has hit a bottom, it generally takes some time to rebuild its base and will trade sideways for months before a new bull run begins. It is during this time that the smart money, or the guys “in-the-know,” are building their positions.
This can often be seen by increased volumes, with little price movement after a stock has hit a bottom. If you’re going to trade, this is a great time to build a position. This “consolidation” phase can last a few months, so be patient.
If you trade frequently, you may want to consider buying into Level II data to see the actual price movements and bid/ask in real time – we would never invest without it and you shouldn’t neither if you’re going to make big bets.
Trading without Level II data is like buying a house without seeing what’s inside. Level II can you a great picture of a company’s market. It can tell you how much support a company has and how many people want to sell at a certain price. Knowing the depth of a company’s market can make the difference between making thousands, or just hundreds.
If the decline in prices continue, we will be buying more stock once we determine our bottom for the companies we are following. These price movements may mark a significant point of entry if, and when, the market rallies this year as we expect it to.
Our favourite sector remains in hard assets, with a continued focus on gold and silver – despite the recent drop in prices.
Precious metals have always been a hedge for inflation and a hedge against fiat currencies. When you look at what’s happening around the world, the recent drop in gold and silver prices should only be temporary.
Inflation is already here. Those who say otherwise are only lying to themselves:
- Food prices are soaring around the world, with wheat up over 80% from last year
- Oil is trading around $90, despite supply and demand numbers
- China’s inflation is already at 5%, nearing 6% in June
- Import prices into the US are rising, especially from China
- Producer prices rose over 1% in December
- The European Central bank is already raising interest rates to combat inflation
Inflation is not the only reason why we expect precious metals to hold their value this year.
In November, Russia and China announced a decision to abandon the dollar in bilateral trade dealings, resolving instead to use their own currencies. This latest move – a continuation in a series of efforts by both countries to move away from U.S. dollar usage in international trade – further threatens the dollar’s reserve currency status.
That doesn’t mean the US dollar is going away anytime soon. But drops in the US dollar will have an impact on the price of precious metals, as China and other emerging markets continue to buy more gold and silver.
Gold, interest rates, and inflation have always gone up together. Interest rates will go higher, a lot higher, in the long run. Inflation is already here but will also go higher. That leaves a lot more room for gold to climb, which means added benefit to the companies in the sector.
We expect gold to not only hold its value, but climb later this year. If gold continues its climb, it should have a significant positive impact on Minco Gold once they finalize the acquisition of their new producing gold mine.
Good times ahead. Be patient.
Investing is risky, especially in juniors. Please do your own due diligence and conduct your own research.
Until next week,
Ivan Lo
Managing Director
Equedia Weekly
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