Saturday, April 19, 2014

Risk increases with the rising market – buy low sell high!

Back in 2011, I warned that the TSX might have gone up too far and too fast while recovering from the 2008-2009 bear market. The TSX was just above 14,000 a mere 25% or so below our forecasted TSX ultimate bull market peak of around 18,000.  We were at a post bear-market peak just before the summer of 2011 when the saga of the European debt crisis reached its highest panic level and prices fell dramatically (nearly 20%).  Now 3 years later we’re back at 14,000 and the market is once again getting stale and expensive. Over the last month or so, the U.S. markets went through a correction in Hi-Tech speculative growth stocks such as Tesla and Facebook. Speculators bet that these are companies that will grow both revenue and profits at a torrid pace for many years out in the future .  Often these stocks have share prices driven so high that it may take many years of 20+% growth before these companies achieve those goals and when things go slightly less well than forecasted the share prices of these stocks literally fall 10 to 40% in a matter of just a few trading sessions.  Not my style of investing; I am the slow and steady type – I am buy and hold  unless prices get ridiculously high.

We know that if we don’t let our profits run, we may lose out quite a bit in investment returns. Thus these days, we are holding on to our stocks but we’re continuously looking for warning signs. Because the higher the stock market goes the faster it may turn on us and may retrench in valuation.  The latest quarterly earnings season has just begun and analysts had forecast flat earnings and a stock market correction. Not exactly euphoric.  Of course, earnings are better than expected while everyone once again frets about China’s GDP growth. No…. We’re not in the euphoric stage of the bull market… yet.  But we’re getting there. The resource overloaded TSX has significantly picked up recently; it is outperforming the U.S. indexes. Resources do often well in the last stages of a bull market!  Remember an earlier post where I said that an outperforming TSX is like a canary in the coal mine! We’re definitely reaching the danger zone in this bull market.  But how much more profit potential?  We’re entering the musical chair stage of the stock market!

Click to magnify. Sourced from GlobeInvestorGold
So don’t buy a lot more stocks; you should have done that in early 2009 when nobody wanted them. Now, sit tight and consider to convert some of your most overvalued stocks into cash.  Our immediately goal is to build about 20% cash.  Also, consider buying some precious metals such as gold and silver which still are far below their highs. The coming bear market may be related to rising interest rates. Remember the old rate rule; three consecutive increases in the Fed Funds rate spells often bad news for stocks.  We haven’t had even one uptick in the Fed rate yet, but… I don’t think we’re far off.  Then inflation may stick up its ugly head as well and gold and silver may finally start a clear new bull market.
Today nobody likes gold and silver except possibly some die-hard gold bugs and fiat money bears.  So start nibbling on bullion like we have on natural gas. Don’t invest in the mines, just buy their products. Natural gas has now clearly turned around and gas producers such as Peyto and CNQ are shooting up in value. Yes, Canadian Natural Resources Limited - NOT Canadian National Railways! - has oodles of gas and not only heavy oil.  How high can gas go?  Hmmm…. I don’t think $6.00 within a year is impossible.  If Iran and Iraq start producing more oil, oil prices may start coming down, especially when fighting in Syria stops and the situation in the Ukraine cools off.  Guess what, if we are getting lower oil prices, drilling in oil shale goes down and so will the production of a lot of associated gas. That would add to rising natural gas prices!   So, yes it is possible that in the not too distant future oil prices fall and natural gas prices go up.  Just saying…
The world is far from stable and the best way to fight that is to only buy stuff that is cheap; when it goes ‘on sale’ so to say.  Now, there is no guarantee that what is down will not go down further. It is best to wait when the prices of an out-of-favor investment class has stabilized and even better has clearly gone up  a bit from the bottom before you start to buy. Just remember, you read it here first!

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