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Newsletter October 28, 2006 Don't Blame Circumstances Market & Sector Review The Precarious Position of Gold Largest Changes In Raw Numbers (21 Days) This Week's Economic Reports Don't Blame Circumstances We all from time to time face difficult problems, situations and circumstances. Whether it be in our personal lives, the business world and our jobs, or what to do in the marketplace. Our natural tendency is to blame the circumstances that surround us for the particular difficulty we are presently facing. Everything I know about the market said it was supposed to go up and it went down instead. How could I possibly have known this or that would happen? One of the hardest lessons, to not only learn, but accept and understand; is that circumstances are not negative or positive, circumstances are neutral. It is our thinking, our perspective, that make circumstances either positive or negative. Try and think of these difficult circumstance in this vain, - "Everything in the universe has its opposite." There is a North Pole and its opposite is the South Pole. If you live 150 miles from New York City, then it must be 150 miles from New York City to where you live. If something you considered bad happens in your life, there has to be something good about it. If you suffered a loss on a trade or series of trades, you have probably gained a good deal of knowledge as to the why, and you have probably gained even more knowledge about controlling risk. The gains in knowledge, over time, will far out balance the loss or losing streak you have just suffered, by rewarding you in the future. I hope it's clear, that every circumstance can be viewed in two ways. And it's the way we view the circumstance that determines its impact on our thinking and our mental state. No matter how bad the circumstance appears to be, taking another look, from another perspective, will reveal the potential good. Napoleon Hill, author of the classic "Think and Grow Rich," wrote, "Every adversity, every failure and every heartache carries with it the seed of an equivalent or a greater benefit." Market & Sector Review The Precarious Position of Gold We all have our favorite trading vehicles. Usually the vehicles that seem to work best for us or perhaps the ones in which we seem to have a good feel. Personally for me one of those vehicles has been gold and gold stocks. Last week when putting together the most improved (raw numbers of relative strength) report, lo and behold I find DJGSP - Dow Jones Precious Metals Index; HUI - Amex Gold bugs Index; and GOX - CBOE Gold Index. Please remember these reports do not give buy or sell signals or recommendations. What it does show is akin to someone in a crowd waving a flag as if to say: hey look at me! Has the time finally arrived to buy gold stocks? Perhaps, but first let's look at the metal itself: long term monthly chart. Notice how from 1980 through 2000 - 2001 gold was in a 20 year bear market. While I have stated a similar thesis before, according to Terry Laundry, developer and founder of T-Theory Observations , the 20 year bear market that ended in 2001 should be followed by a 20+ year bull market. Bull markets however, do not just go up, up and away: they suffer severe corrections or cyclical bear markets (choose your term) along the way. Even the 20 year bull market in stocks from 1980 through 2000 was met with severe corrections; Think 1987 (DOW declined 41%); 1990 (-22%) or 1998 (-21%). After those severe corrections the Bull Run resumed. Is the gold Bull Run ready to resume? Moving from the monthly chart above to a weekly chart below: As you can see the 65 week EMA has, to date, marked the bottom of every gold correction since the bull market began in 2001. Notice also that this moving average is once again being challenged. In addition the 38.2% Fibonacci retracement level of the entire bull market rests at just above $540 per ounce and this level marked the first reaction low in June. If these levels hold and the advance resumes it will indicate the gold correction will be a relatively soft landing. Under this scenario, that is a soft landing for gold prices, we are probably in an area where gold can be accumulated. On the other hand and something that is more typical than not in commodities trading, a selling climax may be needed. A selling climax may take the price of gold down to the 50% retracement level under $500. I believe if that were to happen you will be hard pressed to find gold bulls for quite some time. Moving on to the gold mining stocks let's look at their condition, below is a spreadsheet similar to last week containing the component stocks of the AMEX Gold Bugs index (HUI). If gold stocks are of interest to you; go to the members section under SECTOR ANALYSIS:Compare Component Stocks by Industry Group, and type in 135 (Hemscott Gold Group) for a more complete list of 57 gold mining stocks along with relative strength percentile rank (for those above 10); current group ranking; trends; accumulation/distribution; and more. Simply copy and paste the data into a spreadsheet, add what you desire fundamentally, or notes, and you'll have an easy reference point in the future. In general these stocks are volatile not only in price but in fundamentals like earnings. The simple reason: a good deal of future earnings will depend upon what the market allows them to receive for their product; gold. For the most part, earnings and returns have risen sharply in recent years, due to the bull market in gold. If gold experiences a selling climax and stays down for a period of time, earnings will surely dive compared to current levels, and that will be reflected in the stocks future price. P/E multiples will expand and/or contract sharply do to investor perceptions of what the future holds. I am also quite sure many of you are aware of the fact that gold is a very emotional market, often carrying to unsustainable extremes. An interesting comparison for the above mentioned stocks is how the data compares with some major averages. The following data is from: Decision Point basis second quarter earnings reports (GAAP); S&P 500 – P/E = 18; dividend yield = 1.8% NASDAQ-100 – P/E = 36; yield = 0.3% DOW-30 – P/E = 22; yield = 2.3% The recent bounce in gold stocks has put most of these issues into short-term up-trends, however for the most part their intermediate and long-term trends remain down. None of these stocks (as of 10/24) are showing volume accumulation although most are oversold. The bottom line is that gold and gold mining stocks, at the moment, are in a precarious position. At this point, this market can go either way. If you wish to play this group at these levels, take a relatively small position, you can always add later, and stop it under recent lows. My preferred method of stopping a losing trade is to let the stock trade under my mental stop point (red line below). Then the following day to take the range of the day the stock breaks and subtract that range from the low point of the break. That becomes my stop. This method will often save you from being run with all the other stops placed at this obvious point. If you are a Jim Cramer fan, he calls Goldcorp; Best of Breed. Largest Changes In Raw Numbers (21 Days) Report Explanation This Week's Economic Reports Have A Great Week! Bill Disclaimer: Trading in securities, of any type, may not be suitable for all individuals. The contents of this newsletter are not a solicitation to buy or sell securities. The opinions expressed are solely that of the author. You must do your own research, contact your own financial advisor for suitability of any investments. Data gathered is from sources believed to be reliable, but NO guarantee as to their accuracy is made.