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Stockbullz.com Weekly Stock Newsletter #10

May 19, 2006

Dear Canadian Stock Investor,

It hasn’t been a fun week in the markets (unless you're shorting).  Prices were slashed on many stocks by up to 50% in this very short time period.

I am not too worried long term because this commodity bull market should last another 5-10 years but in the short term perhaps we need a little bit more time to take out our old highs.

I think we might have a “fake” rally next week that might look like a resumption in the uptrend only to fall lower towards the end of the week and/or next week.

It’s always hard to make predictions for the market on such a short term basis but I try anyways. Like I said on Friday:

“In its most simple form, [the current market drop is] a domino effect. Somebody sells, dropping the price down 2% which hits somebody else's stop loss causing him to sell bringing down the price to somebody else's stop loss etc. This can continue for quite a while but keep in mind that after the stock is sold, the investor gets cash.

So after our stops are taken out and the prices have dropped to bargain levels, I think we will be able to get back to where we were before the dips pretty fast.

This is because people will have tons of cash and the psychology of the market will change all of sudden to very bullish, causing our next run up that will take out previous highs.

The one thing that makes a turn around in the market extremely hard to predict is the fact that summer is approaching shortly. Summer means lower volumes and mostly sideways trading. So perhaps we might continue to drift lower a week or two only to then trade within a range until mid to late August. Predictions like this are far fetched guesses no matter who is making them but I'll try anyways.

One more quick thing to point out is that in order to make good money in the market it is imperative to be in the right sectors. 80% of a stock's gains are related to its sector performance so as long as you are in the best performing sectors you have a very high probability of getting good returns.”

The media isn’t helping either. They are trying to scare small investors by quoting analysts who claim the commodity run is over. I have even heard an analyst already compare the commodity bull market the tech bubble. That is quite funny to me.

I am just checking back at some charts of JDSU, one of the star tech bubble stocks. Between 1999 and 2000, it went from a low of $3.91 to a high of $153.42! I still haven’t seen any returns like this. Granted many penny stocks have gone from the $0.10’s to the $1.00+ but I don’t we’ve had any 40+ baggers yet (in less than a year!). (Plus you can't margin stocks under $2 or $3 so we need higher prices on all the penny stocks before we can start to go crazy.)

I think we will see returns like this though before the commodity bubble pops. For your information, a return like that could turn a $10,000 investment into $400,000+! Yes that is nothing short of spectacular and I think that we will all have the opportunity to be a part of some stocks that do this well.

However, the key will be to sell at the right time. If you bought JDSU at the very top at $153.42 and held on until the bottom in 2002 at $1.58 your $10,000 investment would have turned to $102.99. Unbelievable eh?

For a graphical perspective, look at these charts: Bull Market and Bear Market.

Since I mentioned Dines on Friday and his picks, I would like to pass along a quote from his Mass Psychology Book that I am reading right now:

“Suppose that a commodity (traded in a volatile arena) moves up, but the comparable stocks (traded by people who are more conservative than commodity traders) have not yet moved up; the result is what we mean by an Anomaly! For example, people in the copper mining industry might envision a shortage and higher prices, so the most aggressive speculators immediately move into the copper-futures markets, pushing up the price of the commodity. Conservative stock buyers, reacting more slowly, might not move into copper-mining share quite as quickly, so the copper commodity might be rising even while the copper-mining shares have not yet begun to move, and the Key Perception is to buy copper-mining shares even while they are stagnant because the copper commodity has been rising!”

[If you look at a chart of copper related to Capstone, you will see that copper has recently been outperforming Capstone (or Capstone underperforming copper). So within months, either copper has to drop or Capstone has to rise. I think Capstone will rise.] 

I am currently Dines' book and it is quite outstanding. Although written 10 years ago many of the predictions are coming true. I will be sharing some more wisdom from this book over the coming weeks as I finish reading and analyzing it.

Silvercorp announced great results again this week and it still went down. Right now it is 35% off its all time highs. I don’t know how much lower we can go but if you are looking long term, this will be a great investment when looking back 2-3 years into the future.

Nova should release their first drill results next week. They are B samples so I (nor does anyone else) know what to expect. They could be dirt but if they do hit any uranium that will be a positive. The only problem is the uranium sector; it’s a temporary downtrend. Even though Silvercorp announced great news, it didn’t push the price higher. Even worse, it sent the price lower. This is just an affirmation of the sector being more important that the stock.

Lastly, I cannot believe how much Silver Wheaton has dropped recently. They’re currently down almost 50% off their highs a couple months ago. This is despite the fact that the CEO reported that they expect the next quarter to be much better than the previous one (which was good). If you like warrants, SLW ones will be a great buy as soon as our downturn is done.

That’s about it for this week. Thank you for taking the time to read this and I wish you luck in your investing decisions,

Mike

*Note: Many of these picks were recommended on my old blog first.

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