Sector Rotation – Financial Stocks And Commodities

by Olivier on January 6, 2011

Tonight I’ll write a bit about my thoughts on the sector rotation we are seeing right now. It should be very obvious by now I didn’t reopen positions in the precious metals sector back in September and October last year. CNL.TO – Continental Gold being the sole exception. My rationale for doing so was because I was starting to see strong signs of the precious metals trade being a very crowded trade. I am still bullish gold and silver long-term and I continue to hold my physical bullion position. But as far as trading is concerned I try to keep an open mind and try to find ‘new stuff’. The ‘new stuff’ I am looking for is best described as stocks or sectors entering what I perceive to be a new trend. I try to be patient and wait for price confirmation. Then again, I try to be early enough in order not to compete with pure momentum players. I do this for two reasons:

  • Volatility tends to be lower when a trade is less crowded.
  • I don’t want to compete with the best momentum traders.

The beauty with trading is you are free to choose your competitors. I consider aggressive momentum traders to be the best traders. In my book it doesn’t make sense to trade the most competitive set-ups as my strengths are clearly more related to identifying macro changes and new trends. I then use my technical skills to find entries just before the momentum crowd discovers a stock or a sector. This year my plan is to talk in a more detailed way about my trading style and how I view things i.e. to talk more about my personality as a trader.

On to my thoughts regarding my portfolio positions and a few sectors:

  • Financials: We are clearly seeing a rotation from extended sectors like silver into the financials. I mentioned MBI – MBIA Inc. as a trading idea in December. MBI has moved up 30% since, while SLW – Silver Wheaton is down 25 % in the same period of time. So much for trading one’s opinions as opposed to listening to the charts’ message. Talking about financials, C – Citigroup looks like it wants to go up. Needless to say it is one of the most hated stocks out there. From a purely technical perspective though it is starting to shape up.
  • Silver: Long-term I am still bullish Silver. Short term I would stay away and wait until the charts set up again.
  • Natural Gas: Natural Gas is a turnaround idea for 2011. My way to play that investment theme is LNG – Cheniere Energy. As mentioned above I got pretty lucky with my timing. Now I wait until more aggressive momentum players discover the stock and jump on board. The recent volume spikes will make sure they will find their way into the stock as LNG will appear in lots of volume scans. So far LNG looks great. If we get some more follow through my first price target is 10 US$.
  • Tech stocks: There are still lots of tech stocks looking very good out there. APKT – Acme Packet comes to mind.
  • Gold: Same as silver. I think the stocks and the metal itself need a breather here. I still view CNL.TO – Continental Gold as a stock with outstanding potential. The next drill results will show the way. In a few days I will probably raise my stop loss. Not sure yet. When I do, the charts on my public list will reflect the change.
  • Uranium: As mentioned above I was looking to position myself in a sector I deemed to be less crowded. Uranium fits that description as we are in the earliest stage of a potential Uranium bull market lasting a few years. Like with Natural Gas we are probably witnessing a Uranium turnaround. Today’s weakness is a bit surprising. I did expect more strength. Nonetheless I cautiously added to my UEX.TO – UEX Corp. position. I simply bought ‘when it hurts’ as stated in my chart annotations. We are now setting up for the long-term buying opportunity for Uranium stocks I outlined back in August. Most traders have ‘missed’ this first move in Uranium. ‘Missed’ is obviously not true as the ‘correct’ entry point will be when the stocks break out of the current consolidation pattern in order to resume the new uptrend. They should soon be eager to buy into that new investment theme. DNN – Denison Mines along with CCJ – Cameco are some of the big cap go to stocks that come to mind. Ultimately the charts will tell us if that assumption is correct. The stronger they behave and the more difficult it is to enter, the more valid that assumption is likely to be.
  • TMB.TO – Tembec: This is the stock I have barely talked about since I entered. So far it is my best performer. The adage that comes to mind here is: ‘Winners take care of themselves.’ There is not much else I have to say.

Man will occasionally stumble over the truth, but most of the time he will pick himself up and continue on. – Winston Churchill

My public list with all my charts can be viewed here:

Buenas noches!

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