Chuck checked in late yesterday…

Greetings from Chuck:

I sent out a recent article warning of an imminent correction in the stock market. I also cautioned of possible sympathy in the gold sector. And alas, it came to pass during the past couple of weeks. It dampened but definitely did not ruin our time in beautiful Puerto Vallarta. That is extremely difficult to do.

As I tried to often convey, these sell offs have been a recurring pattern in the gold market since 2001, or when gold was $250 per ounce. But now I believe that another bottom is at hand and 2010 should turn out to be a spectacular year in both gold and the mining shares.

Most of the time, the mining shares tend to lead the bullion, but there are times when the opposite occurs. This appears to be the case at this time. Since there is still fear in the share market, the smaller mining companies might require some sea legs and the gold stock buyers might need some courage and confidence. But over some time both should take place.

Here are some random thoughts on the gold market at this point.

I. The Commitment of Traders weekly figures dropped very sharply this past week. Bob Hoyes’s work on this subject tends to be exceptionally accurate. He measures such things through historical models such as the COTs and overbought and oversold conditions. Bob is very bullish on gold, and especially towards the junior shares based upon historical patterns.

II. The shares still have never had any inkling of a speculative froth. Even today, with gold up around $25, you might have guessed that gold was unchanged. There still is a remarkably healthy unbelief about the future of these stocks.

III. Shares exaggerate at tops, and in this case after a sharp sell off especially as they approach a bottom. Here are some reasons for these exaggerations.

• The shares are very thin and the spreads between bid and offer rise. Some trades can move the shares down 10% on very light volume. I have seen this in several of the ones I own and recommend. For instance, Golden Arrow went from $.40 to $.35 in one trade of about 5,000 shares or $2000 the other day.
• Holders lose confidence and perhaps for no reason but nerves sell while buyers hold off fearing lower prices.
• The fear of a repeat of the 2008 meltdown in the financial markets still lingers. I don’t think this is going to recur, at least not at this time.

All of this brings up the crucial question of whether you should get out, hoping to get back in at the bottom.

• Here are the things to consider.

1. The stock you sold could have gone up; VIT and SPA are two examples.

2. The spread is a killer. Say a stock is selling at $.34-$.36. The commissions might be 4% back and forth. You have to be right by almost 10% and that is unlikely.

3. You must have excellent timing because you are not going to get the high or buy at the low. Very few traders have the courage or skill to trade short-term.

4. Once a bottom is in, the stock might move up 10-20% before you react because you are thinking it might still go lower.

IV. The principal driver in this decline has been a very strong, persistent dollar short squeeze which has amounted to almost 10% since December. This rally has been revealed in the COTs which had all categoies hugely long. I don’t believe there is any real long-term chance of the dollar remaining strong short of a money panic.

V. Dan Norcini’s recent analysis of charting. I wish to include a terrific analysis from Dan Norcini at Jsmineset.com on the effects of charting. It is very worthwhile reading, if you are or wish to be a real student of markets.

http://jsmineset.com/2010/01/31/trader-dan-comments-on-the-chart-pattern-experts/

VI. Finally the Sentimentrader.com, another excellent technical service reported and speculated on the stock market’s technical condition. Even though this analysis applies to stocks, by proxy it pertains also to gold since they have been trading at the hip for a long time and will probably continue to do so in the foreseeable future. Here is what they had to say this morning.

Since most of you are primarily interested in the share market, most of my comments apply to that sector. The fact that the shares are still ridiculously low relative to the price of the metal is not negative but, in fact, immensely positive. It is much more worrisome when the shares start to greatly outperform the metals and when there is a lot of unbridled enthusiasm on the internet. We all know that this is not the case now. This is coming, but perhaps not until towards the end of this year will this be a concern. There is still an amazingly lack of interest and even fear towards these smaller shares which means we are still very, very early in the cycle. Rather than think of paring down or liquidating, I still believe that we will reflect upon this date with amazement and wonder why we were so cautious and fearful. Chuck ikiecohen@msn.com