Last week we were in search of clarity. Shocking to most market players, gold and the markets were rallying together even on bad economic news. Finally by the end of the week, logic seemed to have set back in as gold continued to rally on bad news while the markets started to fall once again. The bulls are anxious for another QE3 to prop up the markets, but more liquidity in the markets will not fix the structural problems that our economy faces. That starts to set up a reason why more QE may not even be good for the markets. In the meantime, the bulls will try to keep hope alive with anticipation of more QE to rally behind.
While I’d like to be more optimistic about us having a sustained rally, I believe we are more likely to be in a trading range for a while longer with more bounces. This should hopefully create a solid base to build from that is more sturdy for upside momentum. In the meantime, we have to stay prepared for more whiplash and ultimately more downside risk. I don’t believe we can be comfortable that we have reached the lows of the year just yet, but a collapse from those lows is also not likely at the moment either without some more very negative headlines.
With all this volatility, I’ve found it is best to be hedged both ways and sell or go short on bounces while buying longs as we near the bottom of the trading range. Individual stock charts are broken which is not providing good reason to believe in solid footing. This is still keeping me from playing individual stocks outside of some day trades. The risk of holding overnight is too great for most stocks. Index ETF’s still seem to be the simpliest of trades in this environment as even if you are wrong, you are likely only wrong for a few days. Proper portfolio management with high levels of cash can ensure even a bad start to your trade can still finish in the green.
I was too early to the ProShares UltraShort Russell2000 (TWM) trade just over a week ago, but proper management of the position ensured I was taking profits by last friday rather than losses. Trading around core positions are key to trading success. This is especially true in a market like this where we can swing up 100 points in one day and end down 100 points by the close. Volatility like that means we must be quick to move or stay on the sidelines and prevent losses from accumulating. Many seasoned traders are still sitting on the sidelines and taking a mini-vacation because they find this market too risky to put capital to work in. That is a strategy I can not argue with when the markets act this volatile. Prevent losses now because opportunities are being created. Soon, we can deploy our precious cash back into the markets when the next bull market shows it’s face. When we use this strategy, we can be profitable much faster because we did not rack up significant losses to recover first.
We will have more economic data this week likely handcuffing the markets, see below. Bad news is not always bad news though, so we can’t assume that bad news is going to bring the markets down time and time again. At some point, bad news is already priced in the markets or it gives reason to believe QE3 is coming soon so the bulls mount an offense creating a bounce. This is reason enough to keep positions smaller than you normally would in a good market.
| Date | ET | Release | For | Actual | Briefing.com Forecast | Briefing.com Consensus | Prior | Revised From |
|---|---|---|---|---|---|---|---|---|
| Sep 06 | 10:00 | ISM Services | Aug | 52.0 | 51.0 | 52.7 | ||
| Sep 07 | 07:00 | MBA Mortgage Index | 09/03 | NA | NA | -9.6% | ||
| Sep 07 | 14:00 | Fed’s Beige Book | Sep | |||||
| Sep 08 | 08:30 | Initial Claims | 09/03 | 400K | 400K | 409K | ||
| Sep 08 | 08:30 | Continuing Claims | 08/27 | 3700K | 3700K | 3735K | ||
| Sep 08 | 08:30 | Trade Balance | Jul | -$51.0B | -$51.5B | -$53.1B | ||
| Sep 08 | 11:00 | Crude Inventories | 09/03 | NA | NA | 5.281M | ||
| Sep 08 | 15:00 | Consumer Credit | Jul | $5.0B | $5.0B | $15.5B | ||
| Sep 09 | 10:00 | Wholesale Inventories | Jul | 0.7% | 0.7% | 0.6% |
I’m still short the markets by going long ProShares UltraShort Russell2000 (TWM) and long gold through gold miners Market Vectors Gold Miners ETF (GDX), but I’ve been taking profits and looking to reload on weakness. For long trades, I’m trying to stick to stocks in sectors that continue to perform well such as rare earth metals and gold miners. These sectors are allowing for individual stock strength in a bad market so, I continue to work on a shopping list among those charts. I’ve downsized my Gastar Expoloration (GST) position as it continued to work higher during the last bounce and will look to buy back according to my previous strategy.
A few stocks on my radar this week are:
Molycorp, Inc. (MCP)
Jaguar Mining Inc. (JAG)
Richmont Mines Inc. (RIC)
AuRico Gold Inc. Ordinary Share (AUQ)
Midway Gold Corp. (MDW)
Nevsun Resources Ltd. (NSU)
Vista Gold Corp. (VGZ)
Endeavour Silver Corp. (EXK)
IAMGOLD Corp. (IAG)
As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long TWM, GDX and GST, but positions may change at any time.
