Tuesday, February 24, 2009

Trading on top of big picture fundamentals

There is trading, there is longer term investing and there are fundamental underpinnings of investing. I like an approach that recognizes all three. Underlying fundamentals are important to understand as an investor, because they tend to cause the underlying long-term moves, though stocks often lead or lag the fundamentals. Trading relates more to technical analysis and timing of surges in the direction of the major trend and pullbacks against the trend.

Not exactly new information, I know, but I always like to re-visit and keep an eye on the big picture. Here are the fundamental facts as I understand them:

1. We are in the midst of a deflationary credit contraction, the size and ferocity of which will rival (if not surpass) the last so called "Great Depression."

2. We are not yet close to the bottom of the current cyclical bear market, which is occurring in the context of a secular bear market that began in 2000.

3. The only "long-term" (i.e. measured in years) safe havens in this storm are cash and cash equivalents (e.g., gold and short-term U.S. Federal government bonds) and gold mining stocks.

4. The deflationary credit contraction cannot stop until all the bad debts are purged from the system. As long as the credit system is contracting and unstable, inflation and economic growth are highly unlikely to occur.

5. The banking system in the U.S. and Europe is insolvent. Bankers, the credit dealers in our economy, cannot perform their role of extending credit until they become solvent/stabilize. Until housing and commercial real estate prices stabilize, it is not reasonable to expect the banking system to stabilize. Housing and commercial real estate prices are not yet close to stabilizing.

For those who don't like to trade, this is all you really need to know. There are a few significant real world applications of this general knowledge:

1) If you leave your life savings in general stocks, you will lose most of your life savings.

2) Don't buy real estate (or invest in real estate-type vehicles).

3) Cash and gold held in an arrangement that eliminates counterparty risk are the best investments for safety and gold mining stocks are the only sector of the economy in a bull market, as deflation is wildly bullish for gold miners.

Sometimes keeping things is simple is better, no? And yet, most people are leaving their money in the stock market like good little sheep, out looking for real estate "deals," and smirking along with CNBC commentators when gold is mentioned.

A final steep leg down in blue chip gold mining stocks began today. This tells me that the quick, deep gold price correction I have been waiting for is now underway and should only take 2 weeks or so to complete 90% of the move down - patient potential buyers get ready. I also suspect this leg down in blue chip gold miners won't take long and will provide the buying opportunity for which I have been patiently waiting. The miners will bottom before the gold price, so don't rush to buy gold too soon until you see the gold miners stop dropping.

My favorite blue chip gold mining stock is Goldcorp (GG). This stock should now be in its final 1-2 week leg down in a correction that began almost 2 months ago. The base being created by this stock for a spring launch has me extremely excited. I will be betting the farm on this stock soon.

Here's a current chart of GG:

Here's an example of typical similar prior GG stock price action during last year's bull run (2007-2008):

And here's what happened next in 2008:

Now folks, a 40% gain in 2 months is more than enough for me in a stock. And, since I use options, this is likely to be a potential 80% (or more) profit opportunity if history rhymes and it should only take 4-8 weeks to make that kind of gain. Also, please don't think the example in the charts above from last year's bull move is unusual for GG!

I'm going to be busy until early next week and posting will be quite sparse - happy trading...

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