The Beginning of the End

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A lot of profits have been made in the market since last September.

Does it surprise me that the markets took a major step back on Thursday, when practically all of the gains made since late January were wiped out in a single day?

Are you surprised?

The classic “play-it-safe” mentality would tell you that anytime an investor doubles his money, he should sell half of it, and let the rest of it ride. Both the S & P and Dow have practically doubled since the crash. If you’re not already defensive, then you may want to reconsider.

In one of our early January issues of Equedia Weekly, “Beyond Comprehension,” we predicted the markets would pull back:

“The markets closed very strong last year and as such, we would not be surprised to see a slight pullback between now and Q1 earnings. However, if a pullback happens, we believe the rebound could send stocks a lot higher this year.“

Even though the week closed relatively stable despite Thursday’s pullback and Japan’s quake (which the market has thus far overlooked, but will take notice next week), we should brace ourselves for another round of ups and downs.

I expect more selling pressure and sideways trading as we enter next week’s quadruple witching options expiration, which combined with global uncertainty, is likely to keep the market on a bumpy path.

Be cautious.

(Quadruple witching happens only four times a year and refers to the third Friday of every March, June, September and December. It is a day on which contracts for stock index futures, stock index options, stock options and single stock futures all expire. This usually results in increased volatility, as investors attempt to unwind their futures and options positions before the contracts expire. This activity frequently includes repurchasing contracts and closing out position market capitalizations.)

However, if the markets climb next week, we could likely see a very strong bull market for the rest of the year shortly after Q1 earnings are announced.

I don’t mean to tell you not to buy stocks, or to sell your current holdings, but having some cash set aside to buy on major pullbacks would be smart.

While it’s nearly impossible to find the exact bottom, a big enough dip in a stock you already heavily favour could prove to be very rewarding later this year. I’ve already begun to, or I am trying to, accumulate shares of companies I really like – especially those in the resource sectors such as the precious metals juniors and the bigger gold producers.

“To make money in the market, I never buy at the bottom and I always sell too soon.” – Baron Rothchild

If we are to see a continued pullback over the next few weeks as I predict, it may be the natural correction that we have been looking for what I feel is a short term bull market for 2011. That means, absent of any major oil shock, investors may want to start thinking now about their wish list for this year.

I continue to like precious metals investments such as the gold and silver juniors. Like other successful newsletter writers, I’ve been favouring gold and gold stocks. But I have been even more bullish on silver, as can be seen in our past newsletters and the investments we have made in the last few years – with all silver investments climbing significantly in value since our initial reports. (see Enron Lives On)

Silver broke through a new high of $36 recently and despite the easy double since our letter The Silver Conspiracy, I think there’s still room for improvement.

While many of the silver producers, both small and large, have climbed along with the rise of silver, there are still many of them that have yet to catch up with the new price of the human metal. With the recent pullback in stocks, I am heavily favouring this sector and will continue to pursue my investments in these stocks.

Minco Silver (TSX: MSV)(OTCQX: MISVF), a company featured in the Equedia Report last year at $2.56 (see The Brink of Milestone), just got its target price raised to $7.50 by BMO.

Of course, gold is still high on my priority list.

Again, same principles apply for gold as they do for silver in terms of trading. I am expecting many of the big producers such as Barrick, Goldcorp, and Anglogold Ashanti (even with the rise in oil prices) to move forward in share price for 2011. I like Goldcorp’s prospects for growth and as the lowest cost producer, but compared to Barrick, it is much more volatile, so I am cautious. These stocks are trading close to the same range as they were before the crash of 2008, when gold was less than $700/oz. Gold is now double that.

As for the gold juniors, there are a lot of them that I like – but they all have a few things in common. They all have a great management team, great property prospects, and they all have MONEY – which is particularly important in a volatile market. Junior golds with great prospects and management have no problem raising cash right now. As a matter of fact, they are having a harder time turning it down.

Kiska Metals (TSX.V: KSK), the latest gold junior featured in our Equedia Report Edition (see The Next Big Alaskan Play) just raised $15 million. Of course, the pullback in the markets along with the recent financing has pulled the stock down. If Kiska trends down further, I am considering picking up more shares to average down. I own shares all the way up to $1.37 and have a hefty position of my junior portfolio weighted in Kiska and I am perfectly comfortable holding it right now. They haven’t even scratched the surface of their drill program yet. Charles Oliver of Sprott Asset Management also had a few words to say about Kiska in his latest interview with the Gold Report. Here’s the interview: Charles Oliver: Out of Africa, into Americas

Next week will be volatile – there’s no question.

The S&P 500 traded below its 50-day moving average last week. Be extremely cautious, but also available to take action on strong pullbacks. Japan’s worst quake in history has just begun to infiltrate the markets. There was only one trading day for the market to react. The weekend will give the world audience enough time to fill the market with fear.

More than 6 million people have lost their power, which is 10% of Japan’s population. Damage numbers and deaths are still climbing. No one knows yet what the final death toll will be in Japan. Already hundreds of bodies have been found. Fires have raged up and down the Japanese coast. The video images of monstrous tsunamis tearing across the coastal countryside suggest damage and loss of life on a large scale. But no one knows yet exactly what the numbers are. Basic materials may see a boost based on rebuilding efforts.

While Japan can recover quickly from this and global impact is more than likely minimal, the market may see things differently.

Perception is reality. There is conformity amongst fear.

My heart goes out to Japan and the family and friends who have loved ones there. Organizations are accepting donations for relief efforts. I will be donating. I hope you will too.

Until next week,

Ivan Lo

Managing Director, Equedia Weekly

Equedia Network Corporation

www.equedia.com

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We are biased towards Kiska Metals because we own shares of Kiska Metals. We are also biased because they are a client of ours and we own options in the Company. Minco Silver was also a past client. Our reputation is built upon on the companies we feature. That is why we invest in every company we feature in our Special Report Editions, including Kiska Metals.

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