February 28, 2007 – If you have been reading my blogs consistently, there is 0% chance that you should have been caught unprepared by the recent correction of the Chinese markets by more than 9%, and the associated 3%-4% drop in the U.S. markets. Certainly losing 9% in one day would have been no fun at all. That is why you can see here, with two Chinese stocks we purchased, FMCN and LFC, we sold both once we had reached approximately100% profits on both in a very short time period.
Always Lock in Profits
I have repeatedly warned investors for at least two months now that most major markets looked overbought and that except for a couple of asset classes (i.e. gold), it was time to lock in profits. Here are the blogs where I spoke about this: In October, I blogged about how the U.S. insider sell to insider buy ratio was growing extremely skewed at 18:1 and that corporate insiders in the U.S. markets had virtually stopped buying anything and were selling massive volumes of stock to lock in profits. Also, in October, I mentioned that if markets keep rising higher with no correction to consider “both Rydex and ProFunds offer inverse funds for the S&P 500 and the DJIA that move directly proportional to these two indexes.” Indeed, my positions on the ProSharesUltraShort S&P500 (ticker SDS) which I have consistently been adding to over the last three months rose almost 8% yesterday, and many of you know that I have personally told you to establish positions in the SDS over the past couple of months. 
On November 7th, I wrote a lengthy blog about always locking in gains. And as recently as January 25th, less than a month ago, my partner Kaeho warned extensively of a correction when he wrote this tongue-in-check blog paying tribute to the film the Matrix: “Even now as some of the major world markets begin to show signs of weakness, signs of the fact that the market’s run at the end of 2006 was just an illusion, they continue to tell you not to worry. That this is just a blip on the horizon and that any dips in the market are opportunities to buy even more. Though you believe them, underneath it all, in the pit of your stomach, you know something is wrong. You feel as if you are buying into the wrong things even though everything is still rosy now. It gnaws at you and keeps you up at night, knowing that you have put your entire financial future in the hands of men and women whose job it is to get you to hand your money over to them. You know something is wrong and that is why you are here. Do you know what I am talking about?”
Yet despite all of our warnings, we sat back and watched the thundering sheep herd buy and buy and buy instead of selling to lock in profits. Everyone that has read all of our newsletters and blogs noted that we predicted a drop in gold and gold stocks to begin 2007. In fact, even when gold experienced a 2006 year end push, I had this to say on my December 28th blog entry (user password: knowledge1248): “With the price of gold, I’m not yet 100% convinced yet that this uptick we’re seeing is the beginning of the next bull leg for gold. I still need to see some type of sustained movement higher in gold stocks to indicate that perhaps a true bull leg is forming”. In the new year, when the correction came that we at maalamalama had been waiting for, I blogged that the time to add to existing positions was right. Well why did gold stocks take a hit yesterday as well?
What Should You do About Gold Stocks?
This is simply a case of the thundering sheep herd selling out of everything and panicking. In reality, the sell off in equities world wide should help gold stocks. However, reality also dictates that the thundering sheep herd is always irrational. So if global markets continue to decrease over the next several days or weeks, I do not expect there to be an immediate re-direction of money flow from traditional stocks to metal resource stocks.
The widespread sell off across all asset classes, if it continues, (and I believe it will)
will probably continue to hurt gold stocks in the short term but in the long term, this will actually be very helpful to gold stocks. In fact, gold will be one of the few asset classes to benefit from a general weakening of traditional equity markets. So what to do? If you have been purchasing gold stocks for the past six months or so, despite the corrections yesterday, you should be sitting on some really healthy gains of 30%, 40%, 50% or more just in the past six months.
It never hurts to lock in some gains at this point and perhaps consider re-buying once the markets have re-stabilized. I wouldn’t recommend completely selling out of positions to lock in gains as gold stocks are historically a very volatile asset class and the rebounds could come just as furious, leaving you on the sidelines wishing you had held on to greater positions. As well, there is also the danger of junior gold mining companies releasing stellar drilling news and having these stocks appreciate considerably despite continuing overall global weakness in the stock markets. You need to carefully pick and choose what stocks to remain fully invested in and what stocks you may want to pare positions in on a tempoary basis. However, I’m not going to go into great detail about this, as we explain everything you need to know about how to play this asset class and market corrections inside the member only section of our maalamalama curriculum.
What if You Just Recently Bought into Gold Stocks?
You can take the above strategy of being cautious, or if you don’t want the hassle, consider the fact that the reasons why you are invested in gold are not affected by this recent display of global market weakness. Remember, I don’t believe that this is a typical correction in gold stocks that is beginning but rather one that is being induced by the worry in the rest of the global stock markets – a worry, that by the way, if it continues, should produce very favorable results for gold stocks in the long run.
To learn more about how to profit from declining markets, be sure to read part II of this blog entry tomorrow.
[tags] ProSharesUltraShort S&P500 , gold, gold stocks, how to invest in gold,wealth literacy[/tags]
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
