Views from the Crows Nest: May 2013 Issue

Welcome to the May 2013 Views from the Crowsnest.

The great gold trader Jessie Livermore is credited with saying “The biggest profits are in your patience.” This wisdom rings true whether you are still invested in US equities which continue to rise seemingly incessantly, or you are waiting to play the downside in equity markets.

And if you’ve already exited most or all of the equity positions in your portfolio, you may find yourself feeling rather impatient while waiting for the current market euphoria to end. Patience, indeed.

In a recent article I made reference to the fact that selling the very top of the market and/or buying the very bottom are just meaningless ego-based markers. “See, look how smart I am – smarter than you!” is the external validation what we are (secretly) seeking when we get too focused on getting it just perfect. At some point, “perfect becomes the enemy of excellent,” or as Jim Dines posits “Over-efforting creates counter-vailing forces.”

Perfectionism is one of many outward manifestations of a fear-based, ego-driven personality; perfectionism is an absolute killer when it comes to navigating markets. Selling the top or buying the bottom will obviously result in making maximum profits, but that comes with a big price tag – very high stress. It’s also virtually impossible to be 100% right 100% of the time.

Ultimately, what matters most is whether or not one is generating sufficient returns over the medium to longer term while protecting from major downside in the short term. Essentially it comes down to understanding how much is “enough” return to help us become or remain financially independent. Having a current, comprehensive wealth management plan as a reference makes it much easier to see this mapped out in black and white – it provides context.

When it comes to opportunities to make profits, markets usually provide two to three major opportunities each year. Similar to public transit, there’s always another bus (opportunity) coming along. No one enjoys missing that bus they were just a little too late to hop on board – the key it is not get hurt (i.e. losing money) by chasing the bus you just missed.

The bearish divergences within US stock markets continue to build, fewer stocks are making new highs and the unbridled optimism is on full display on the financial channels. So, could US equities rally another 3-5% before this ends? The answer is both “yes” and “so what?” We are never completely certain in the moment about exactly where the top or the bottom is of any trend, but we don’t need to be certain. Seeking certainty in these circumstances is thinly-disguised perfectionism.

A question we are often asked is how far markets will drop when this rise stops: 8, 10, 12 or maybe 15%? Similar to the question above, the answer is two-fold: “I don’t know,” and “it doesn’t really matter anyway.” Mid to late June MIGHT be the time for a summer low, but we’ll simply wait to see what actually develops and then take appropriate actions when fear reigns supreme. Things might also start to get very interesting around the September 22nd German elections. We’ll go with the flow when we get there.

Precious Metals seem to be behaving according to the view we published a few weeks ago; this view came directly from the work of Martin Armstrong, Bob Hoye/Ross Clark and Charles Nenner.

The bounce off the April 15th lows looks like a dead-cat bounce that has already stalled and looks very vulnerable to a full rollover again. Based on these trusted research sources, we expect to see a major tradable low in the whole precious metals space by mid-June, but only time will tell.

Will key technical support in the mid $1,300’s hold this time around, or will that support fail in the midst of other market mayhem (a margin-call-led equity market sell-off?) and we see Gold test the full 61.8% Fibonacci retracement from the 2008 low to the 2011 high? If mid $1300’s support is breached, that brings $1158 into play. We don’t know in advance, but we don’t need to, either. See above.

The most prudent (and challenging) course of action is to get ego out of the way, follow what the market dictates, and when fear once again reigns supreme in markets and few people have hope for a turn-around…that will be the environment in which to take meaningful positions in beaten-down sectors with significant upside potential. Then buckle up for the upswing in the pendulum. This is where the serious profits are made – gains that can help make up for slower growth if you’ve not experienced a lot of gains recently.

Patience and Discipline are accretive to your wealth, health and happiness; Fear and Greed are destructive.

Andrew H. Ruhland, CFP, CPCA
President, Integrated Wealth Management Inc.  
Portfolio Strategist, ETF Capital Management