Bad news is good news & it is good for precious metals

We were just back from a very intensive vacation trip in Australia and New Zealand, 10 connection flights within 14 days between visiting sites. Very interesting but also tiring.  Luckily, trip was very well organized with no any major problems. However, I must say that both Australia and New Zealand are very underdeveloped in terms of the Internet system. Virtually impossible to get easy and free access to Internet unless you pay a deal for it. Even my business BlackBerry had frequent interruptions during the period. So I basically could not really get good online review of the market news and developments.

It appears the market was up and down quite significantly in the past 2 weeks but did not drop as severely as I had expected. Actually the economic news was very bad: GDP was only 1.5% last quarter & much short of expectation, the US consumer sentiments were very negative & were cutting back expenses greatly, new house sales were down, and 46 million Americans (over 15% of the US population) were on food stamps...... But the market just responded positively to the bad news. You know what? This is so-called "Bad news is good news" phenomenon! Because the market is expecting that the Fed will inevitably come back with another round of money printing to stimulate the economy due to the very back overall economic condition, i.e. QE3 will come one way or the other. Of course, we also need to give some credits to the European Central Bank president, Mario Draghi, since his statement  on Thursday that ECB  "is ready to do whatever it takes to preserve the euro" has given the market a strong conviction that more money printing worldwide is coming.

This will be very good for gold and silver & eventually the mining stocks. I think I'm ready to put more money into this sector to catch up with this strong upward trend. For the general stocks though, I'm still not fully convincing that it will simply go up from here. I will wait a bit to see if the uptrend is firmly established, since from the bottom of my heart I still think there is a chance to see a sharp decline of the market before it launches a full-blown rally towards the year end.

Get ready for a severe market plunge

I will be away for traveling in Australia for the next 2+ weeks till almost the end of this month. Given constant changes of locations and the time difference, I'm not sure I will have time to really sit down to observe, think and write in this period. So you may not hear from me for a few weeks. But I don't think you will miss too much.

The main theme for the next few weeks for the overall market I think will be a severe correction. S&P500 significantly below 1300 is very likely in my mind and close to low 1200s is not impossible. So if you are thinking to add more money to any long positions, I will suggest you exercise patience and wait. Better opportunities will be coming soon. Last week's job data was terrible as well as other major economic data around the world. I bet Bernanke is waiting for the market to call for his salvage by announcing another round of printing money, i.e. QE3. Without an end of world kind of sentiment in the market, he is in a very difficult position and may be blamed for manipulating the market and the election if he does QE3 now. But he knows there is no way he can avoid QE3. So my gut feeling is that the market will plunge dearly to allow Bernanke to move ahead with QE3. From the technical charting perspective, it is also arguing strongly for a severe drop.

Personally I want to be prepared for this, especially while I'm away and cannot attend to my portfolio in a timely fashion. So I have taken profits from short-term long oil positions and have added quite a bit short positions with SDS and TZA, which will benefit from the market plunge. I also think gold and silver may experience some severe decline as well in the near term, to prepare them for some significant bouncing up towards the year end, especially if QE3 is indeed in place. Similarly I have also added some short positions for gold and silver such as GLL & ZSL. In other words, I'm very much biased towards a severe overall market plunge impacting virtually on all assets in the next few weeks.

There is no way out for Euro

Poor Markel and Germans. At the last minute of the Eurozone summit meeting, the poor Markel finally yielded to Italy and Spain to agree to use the EU bailout funds to save their severely indebted banks by allowing them to borrow more money to avoid their immediate bankruptcy. Basically the poor Germans are going to use their credit to allow for endless money printing to save the Euro! So Euro has been saved for now again. But believe me, the worse crises will come back again to hit them and the world with shorter and shorter intervals. There is no way out for Euro with such kind of mentality that no one wants to fundamentally solve the problem, i.e. to reduce their debts. Rather, what they are doing is simply adding more and more debts to their already unmanageable debt load. They can still kick the can down the road, but eventually the reality will kick in and the Euro will collaspe badly! But as you know, I'm actually betting the in the near term, Euro may bounce back a bit. If it ever jumps back over $1.30 or higher, I will seriously consider to add more short positions against Euro. That will be another bunches of free money for you to pick up.

The market short-term direction seems to go as I predicted. Friday S&P jumped back to over 1350. I'm afraid it will hit its strong resistance around 1370-90 soon. I have used leveraged ETFs to bet for this short-term uptrend in the past few weeks and I'm taking some quick profits off the table but still keep some in case it will continue to go a bit higher. More importantly I'm starting to add leveraged ETFs (SDS) to bet for a more severe plunge for the market. As I said, I think likely the market will go down significantly first before advancing more upside. Similarly I'm also betting for a fight back for oil and I'm using the leveraged ETF (UCO) to bet for this short term bouncing. Oil jumped 8% on Friday and I'm doing fine with UCO. I probably will get out soon as I think more downside for oil is likely to come before all this is over.

Oil: short-term bouncing back is expected

I have predicted and repeated a few times in the past few months that oil would likely plunge from its high of over $100. Sure enough, in just a short few weeks, it has plummeted like a rocket stone with 20% chopped off. Yesterday, it further dropped below $80, a significant support level. Has it done its froth-removing work? I don't think so. I think there is a good chance that it will further decline to low $70s before its correction is done. But does that mean this is a straight way down? Actually I'm betting now that oil will likely quite significantly bounce back in the very near term before resuming its downturn. Below is the USO (oil ETF) chart. As you can see, it has dropped almost 20% below its 200 day moving average (red line). I'm not sure if you have heard a phenomenon so-called "reverse to mean". It means naturally when something is too far away from its average (mean), it tends to come back to the mean before moving away again. A 20% gap below (or up) from its 200 day moving average is quite significant and almost always it will move towards the average as the next action. So I'm willing to bet against the herd for a quick & sharp bouncing up for the oil price.One leverage way to do so is to buy the call options of an ultra oil ETF, UCO (2 x leverage). Using a call spread, the risk/award ratio could be as high as 1:4.

 

Arena: a potential 5:1 speculative bet

Arena (ARNA) is one of the famous small biopharma companies, focusing on developing weigh-loss drugs. It has tried for years and the most recent one was last year when the FDA turned down their application also. However, they are coming back again and believe or not, this time they got the FDA advisory board 18 to 4 backup for approval. So there is a good chance that this time they may be lucky enough to get their drug approved. The expected decision is Jun 27. So the ARNA stock just keeps shooting up in the past few weeks, almost a straight line up (see below)

Of course, I'm not predicting they will fail but what if just in case the FDA turns them down again? After all, it is not a miracle drug and still has some safety concerns. If indeed ARNA gets a negative ruling, its shares will plunge to where it was around $2-3. So if you are a risk-taker, you may want to buy some put options to bet against the most of the herds. The risk-profit ratio could be as high as 1:5 or even more. It sounds an interesting risk to take to me.

What’s to expect in the next few weeks?

Well, today's is the D day for the Eurozone countries, since the Greek election will largely determine whether there will be an immediate collapse or crisis facing them. In reality nothing will immediately happen but at least this is how it is perceived for its impact. All the evidence indicates though that the Greek people at large don't want to leave the Eurozone although they really hate the austerity plan. I think the election result will give such an impression that Greece will stay and the Euro will not break up immediately. Everyone will be deeply relieved and the market will view this as a huge positive. While the can is kicked further down the road and the crisis will become even bigger and worse later, no one wants to face the reality now. It is the problem of future leaders and politicians, not today's.

As I said recently, I had a hunch that the overall market would likely be doing well in the near short-term. Therefore I have put in some money with SSO (2 x leverage) and TNA (3 x leverage) to speculate this idea of a short term market rally. I’m still thinking this will likely play out as I predicted that the overall market will be advancing up for the next few weeks, especially if the Fed is doing or at least hinting that they will start to further stimulate the economy at their meeting next week. The obvious initial significant resistance for S&P will be around 1370-90. At the current level around 1340, it is not too late to take some speculative positions if you are also convinced with this near term trend. But be aware that this is highly speculative and very risky. If we indeed go up & over 1370 luckily, I will be thinking to take the money off the table to be ready for the next leg down. I think this market correction is not over yet and another test of the May low will follow the current short lived uptrend. Only after that, the market will be ready for a more sustainable rally towards the year end. Simply accumulating more cash is also a good strategy to be ready to join a more solid and significant market rally.

Stillwater mining (SWC) is close to a good buy

Platinum, a more rare precious metal than gold, has been lagging behind gold in price for quite some time. I talked about it a few months ago that I believed its price will sooner or later catch up and come back to its historical level that is more expensive than gold. It has happened yet and this is actually the best time to buy platinum for long term if you have a longer investment horizon. Patience is the key.

One may directly invest in platinum by buying its ETFs, e.g. PPLT or PALL for its alternative, palladium. But I personally like the platinum mining companies better, which is one leverage way to follow the trend. Of course, it is a double edged sword when the company is not performing well that you may get hurt more pronouncedly. SWC is one of the largest mining companies for platinum and palladium. SWC got fire towards the end of last year and early this year, when I was discussing about investing in platinum. It jumped up about 50% or so within a short few months period of time. Clearly people had got too much excited and pushed it way ahead of itself. In the past few months, SWC has given back all and even more. At the currently price around $8-9 or so, I think it is has some great value in it. I’m still a firm believer that platinum will come back to where it should be. If so, I really think SWC will be doing quite well along this trend. I cannot say and no one can be sure if this is its absolute bottom but I like the risk-benefit ratio here from the long-term perspective.