Golden Week, A Buying Opportunity

We’ve been having one of those months that makes all investors feel stupid. I’m down 7% on the week, down 19.5% on the month, down 14.6% YTD, and down 11.8% on the last year. If you’re interested in these little retail-dominated sectors like I am, than you’re probably in the same boat.

Here are the charts relevant to my portfolio:

SPY: S&P 500 index

If you just stuck with investing in the S&P 500 index, SPY, you’d be about even on the year, though with a somewhat volatile ride. It certainly has some powerful tailwinds as blind money from stock buybacks, 401k’s, and pensions crowds in heedless of valuations. Still, the downside risk can be quite significant as the fed hikes interest rates making portfolio leverage more expensive, the earnings cycle peaks and declines, and consumer spending shows the strain of keeping up with basic living costs, and so on. All of the mega-caps have fallen significantly below their peaks, and some of them like FB had enormous drops overnight. When steady flows of passive money push these stocks ever higher, sellers can find quite an air pocket before any real buyers show up. The chart also has the look of a nasty topping formation with a lower low on Friday. On the flip-side, it seems that everyone is bearish, so you never know when a massive rally will start to squeeze out anyone who’s positioned short. That has me nervous about short hedges, though I’m not going long either.

TLT: Long duration US Treasuries

This is my main hedge. Looking at the chart above, it’s easy to ask why. Basically, I don’t think that the Fed will get that far with rate hikes. Parts of the yield curve began to invert from hawkish talk alone, before they hiked 25bps. After that the inversions became deeper and more frequent. Many other recessionary signs are apparent, and recessions typically mean top tier collateral that banks and hedge funds can borrow against like crazy get bid up. If worries start to spread about the vast junk bond market, the banks and funds which invest in those with leverage (or regulatory constraints), they will have to post more collateral or be forced to sell. This often leads to a rush toward higher tier bonds that allow the most leverage when borrowing in the repo markets. Aside from that complex view, you can consider that unlike stocks, long duration bonds are absolutely hated and that they do tend to go up in recessionary periods. Besides, look at the chart below. In the post-GFC world of ZIRP & QE, TLT is more prone to spike than ever, and it is hitting a line of decade-long support.

SILJ: Junior Silver Miners

The SILJ index best represents my precious metals miners. That 30% of my portfolio is all in this highly speculative sector, which has been struggling for almost 2 years now. The recent drops don’t surprise me much, as commodities are overcrowded in general and this is a volatile retail-dominated sector. Basically, I’m sticking to this alternating-decades idea with mining stocks. You have a strong decade like 2000-2010 ending with a spectacular investor frenzy and crash as too much production comes online, then a huge decade-long bust where all investment in the sector halts and supply slowly shrinks down below demand. During such busts, like the 1990’s or the 2010’s, other investments like tech soar as commodities are generally not a constraint. I still feel like we’re seeing a major commodity shortage which will play out over the decade of the 2020’s. In other words, this is a long term play, and I plan on adding or reducing support based on the charts in between. As such, I have made some really good calls, such as levering up like crazy with call options in AG back in January and then selling all of my long calls and reducing dramatically the week ending April 14th. I don’t know when this sector will really soar, but I am convinced its within the next 6 years and I’m planning to be there when it does. Then I’ll exit and move on to other things; there is no such thing as an investment to hold forever. That being said, the time to exit will be when metals and mining stocks are a significant portion of the S&P 500 and new production is coming online. We had a bit of a speculative frenzy during covid, but we did not see any significant growth in mining production. Here’s a chart for you. Make of it what you will, but I see production back down to levels a decade past – and during a time when it’s industrial use has gone up with much more widespread electronics, batteries, etc. Unfortunately I can’t find a good silver demand chart for you, but I do expect that supply will go back to levels seen in 2012-2019 before it peaks out.

URNM: Uranium Miners

The news from this sector is nothing but bullish. Just like with precious metals miners, I believe that this cycle will last the bulk of the 2020’s decade, and I plan to ride it through while reducing at peaks so that I can add at valleys. I reduced a lot week-ending 4/14, and I’m planning on building my position back up despite the coming recessionary backdrop. This sector is small, extremely volatile, and dominated by retail investers so expect massive swings in price. Makes it more fun, don’t you think?

MSOS: US Cannabis

This is a sector which I believe holds much promise, but still acts like a falling knife. Major US institutions can’t invest here because it isn’t federally legal yet. They aren’t opposed to the sector however, as institutional investors have entered into Canadian companies like TLRY. It’s a bizarre situation, as US producers & distributors can only list on the junior Canadian exchange and are restricted from the US banking system while foreign producers & distributors have full access and list on the NYSE. There is a continual barrage of states opening up to it and eying that precious tax revenue, and there is a significant movement to change the situation federally. I see it as a matter of time, and I’ve been steadily adding at new lows to keep my allocations up, without selling anything, and my earlier positions are already down 50%. Whatever, as a retail investor I won’t get fired from managing my own portfolio, and I fully intend to keep my minimum allocations near 15% until this thing plays out.

XME: Metals & Mining ETF

I see my battery metals allocation more in base metals category of the XME chart. I fully expected gold and silver miners to outperform first, then base metals later on as industrial demand really picked up. We had worldwide shutdowns due to Covid restrictions for much of 2020-2021, followed by a real estate bust and subsequent construction bust in China, followed by the current extremely aggressive Chinese lockdowns, and base metals have been absolutely soaring. You wouldn’t know it with the likes of Nickel-Copper royalty company NOVRF, which is flirting with 16-month lows, but the underlying metals must be in critically short supply if they are soaring in this environment – and all at a time when western governments are planning on funneling ever more money into alt-energy projects that absolutely waste these metals with enormous power-lines spreading for many miles which are vastly oversized to deliver intermittent power without breaking at the peaks. Anyway, I intend to build this sector up a bit more.

Here is my latest portfolio:

  • HEDGES (10.6%)
    • 10.6% TLT Calls
  • PRECIOUS METALS (29.8%)
    • 1.3% AG (Silver)
    • 2.2% EQX (Gold)
    • 4.0% SILV (Silver)
    • 4.0% SILVRF (Silver)
    • 2.9% LGDTF (Gold)
    • 2.9% MTA (Gold & Silver)
    • 2.7% MGMLF (Gold)
    • 2.6% RSNVF (Silver)
    • 2.3% SSVFF (Silver)
    • 2.3% HAMRF (Gold)
    • 1.2% MMNGF
    • 1.5% DSVSF (Silver)
  • URANIUM (10.6%)
    • 1.4% UUUU
    • 1.3% UEC
    • 2.3% BQSSF
    • 1.6% DNN
    • 1.3% DNN calls
    • 1.4% ENCUF
    • 1.3% UROY
  • US CANNABIS (15.1%)
    • 1.8% AYRWF
    • 1.9% CCHWF
    • 1.7% CRLBF
    • 2.2% CURLF
    • 1.8% GTBIF
    • 1.8% TCNNF
    • 2.0% TRSSF
    • 2.0% VRNOF
  • BATTERY METALS (8.7%)
    • 4.7% NOVRF
    • 2.6% SBSW
    • 1.4% PGEZF
  • CRYPTO (1.2%)
    • 1.2% XRP
  • OTHER (3.0%)
    • 2.5% DOCN (cloud computing)
    • 0.5% OGZPY
    • 0.0% ATCO calls
  • CASH (21.0%)

I’ve been waiting for a while to get the perfect buying opportunity, when the federal reserve continues with its 50bp hike and tries to scare the heck out of everyone while the Japanese institutional buyers aren’t there to purchase US treasuries. I did jump the gun a bit this week though, adding a little bit each to of a number of different names in my portfolio in all my main sectors – precious metals miners, uranium miners, battery metals miners, and US Cannabis. Its hard to sit on more than 25% unallocated cash while some of your favorite names are hitting new lows.

That being said, here’s how I see the week playing out:

  1. Relief rally Monday morning from oversold lows, speculation that perhaps the federal reserve will ease up after the massive disappointment with Q1 GDP falling by 1.4% when it was expected to rise by 1%.
  2. A violent shock sometime between Monday & Tuesday, as Powell makes it clear that he is moving forward with a 50bps hike, and that his main goal is to crush inflation Volcker-style.
  3. Markets wobble a bit Wednesday as institutions look for buyers to appear.
  4. A significant selloff in both stocks and bonds on Thursday, probably through Friday as the buyers supported by Japanese yield-curve-control policies don’t show up at all during Golden Week.
  5. Counter-rally the following week from oversold lows, massive influx into US treasuries to get that sweet yield.

If it all works out as I expect, I should be 100% invested by the end of the week. I’ll buy a little bit here and there, focusing on Thursday as my biggest potential buy day. I plan to pick up a lot of TLT calls and Uranium miners specifically, though I might go for some of my other names if they are truly beaten to a pulp. I also plan to buy some more XRP which I expect to get somewhere in the 50-cent range.

Anyway, that’s my plan. If you decide to follow me on this, look once more at the lousy returns I mentioned at the top of the page, and realize that this is a bit of a gamble, and that I could lose money in these sectors for quite some time before they turn. I’m still young enough to take risk, and I feel that I need to more than ever if I hope to get anywhere. It’ll pay off some day. Happy trading!

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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