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Hey
one quick note before we get into the market - I'm ahead of schedule and
almost have the Stock Market Mastery Course complete! Although I'm going to
release it in full on May 1st, the day before I'm going to run a 50% off
24-hour pre-release schedule so mark next Wednesday on your calendars.
Now as for the
market I got dozens of emails this weekend asking me if I think the bear
market is over now. I spent the weekend scanning through articles and
commentary and virtually everyone thinks the market is going up from here. On
TV the CNBC and Fox News commentators were ecstatic Friday and this weekend
following the big rally that day while CNN is calling for a top in oil, gold,
and commodities and a bottom in the dollar that they see driving a huge rally
over the next few weeks. Most of the emails I got asked something to the
effect if I think the positive earnings news or these news stories changes anything?
In a short
answer not in the long run. The bull market in gold and commodities is not
over nor is the bear market for the US stock market. That said we've
had a nice bear market rally since the March low and it went beyond where I
thought it would go last week. It could go a few percentage points higher
from here, but I'm still skeptical as I'll explain
why in a few minutes. But first I need to talk about bear markets with you.
I traded through
the last bear market from 2000-2003 and had some of my best years by betting
against the market on the short-side and buying into stocks that were in
sectors that bucked the broad market trend. These were sectors such as health
care, medical research stocks, casinos, and auto parts from 2000 to 2001, and
finally gold in 2002. During this time I personally heavily shorted the
market and I wrote about what I was doing openly just like I do now.
From what I
would gather just about everyone who read what I said back then totally
ignored my comments about the stock market being in a bear market. I know
very few people shorted the market, because I got very little feedback
discussing short selling. Those that followed me just ignored my talk about a
bear market and focused on the stocks and sectors I like on the long side.
What I took from
this is that the general market cannot face the reality of a bear market or
attempt to bet against the market in a bear market until the bear market is
almost over. They have simply been so conditioned by the bull market that
came before them to think about going against the market is too difficult for
them to do. We've been taught since we were kids that you should save and
invest so for some to think about bear markets means discounting belief
systems that they have held for their entire lives.
What is more
bear markets themselves provide occasional huge one day rallies and bigger
bear market rallies that retrace losses that create both fear and optimism
among market participants at the same time. The rallies make the press
optimistic about the market while market participants watch the market go up
and get fearful that they are going to get left behind. Most cannot sit out a
rally with the knowledge that the market is going to eventually come back
down to them or that it is better to wait for better conditions before
investing. The bottom line is that people are motivated more by greed than a
fear of losing money and this is why people hold on or
double down on their positions during bear markets until they are
practically wiped out.
That can make
for a tough time for someone in the newsletter business, because if you
remain bearish during a bear market it doesn't help you win subscribers,
because very few people are interested in short selling and many others don't
want to hear about bear markets. I found this out in the last bear market and
the same thing is happening again. I've been bearish on the market since late
last year and explained the signs that I thought would point to a new bear
market before the drop began. Those signs all transpired back in December.
Since then I've taken some short positions and gone long stocks a few times. I've
gotten lots of emails and feedback about the long positions, but almost none
about the short positions. From what I can tell on the website there are
three or four people who have posted about taking short positions in the past
few months while dozens have talked about gold stocks. Back in January I
bought near the panic bottom and everyone was interested, but when I shorted
the other week I didn't see much interest. That's good in a way since the
market went up last week, but the point is that I'm worried more about the
long-term.
The market has
rallied hard the past week. It could top out right here or it could go up
more. I can't know what it will do for certain, but I know its still a bear
market and people who try to play into a bear market rally if they don't use
stops will get burned. I don't want that to happen to you. Investors should
ignore the market rally and ignore the news. The market is not going up,
because the earnings news is good. These are purposely low estimates that got
beat last week. The market went up, because when the market is in an uptrend
the news is all good. When the market is in a downtrend
good news gets sold. The market has been having a bear market rally and will
continue to go up until the rally exhausts itself.
Most people
should make money by continuing to focus on the sectors still in bull markets
and buying them on dips - which means commodities - and by having a good cash
position that you can deploy in a year when this bear market is really over. Those
that can should use a good portion of their account to short rallies when the
market gets overbought with tight stops. But no one should just be diving
into the broad market right here just because there is a big rally that makes
them scared that they are going to miss out. But this is exactly what the
masses do.
In the past
month I've added two new gold stocks to the WSW Power Picks list. The last
one was added on Thursday and is up almost 10% already. On Friday it went up
even though gold stocks as a whole dropped. They
are both small cap gold
stocks.
 
One thing that I
keep a close eye on is the HUI/gold ratio. This ratio has been in a
slight-downtrend since October. What this means is that gold has performed
better than gold stocks overall during this rally. However, this may change
in the coming weeks. You can draw a downtrend resistance line on the HUI/gld ratio. It appears that within a month this line will
be broken to the upside. Once that happens we should see a sharp rally up to
and beyond the March highs for gold stocks. I also believe that in such a
rally leadership will start to shift to the smaller Canadian juniors stocks.
This weekend I
went through 800 of the most actively traded Canadian juniors. I wrote down
about ten that look like they will be interesting buys over the next few
weeks. As a whole though these stocks have been dead for months. Many of them
haven't really gone up or down at all this year. They have just been going
sideways. I think they are lining up for a big rally ahead of us and am watching them carefully. If we get another big gold
stock rally these stocks are more attractive to me now then the larger cap
gold stocks, such as Kinross, EGO, and Yamana. I
still like these stocks, but they had big runs since August. These smaller
stocks haven't and there are small juniors that actually are cheap on a
fundamental basis. I already picked two out on the website, but there are
more to be found.
To take a risk-free 30-day trial to WSW Power Investor just click here
.
Mike
Swanson
Editor, Wall Street Window
Disclaimer: Michael Swanson is the President of USA Capital, Inc.,
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