The S&P/TSX Venture Composite Index (CDNX) is down some 23% since the recent market peak on March 6, 2011. We all know that stocks on the TSX Venture generally go through a summer pullback period before roaring back in the last quarter of the year. In order to put the most recent pullback in perspective it is worth taking a look at past cycles performance.
Below is a chart showing the value and volume changes from spring peaks to summer troughs of the CDNX.
* The "Black Swan" year 2008, and the recovery period in 2009 are excluded from the chart.
Based on the historical data it appears that both the volume of trading, and the value of the index is near the bottom for the current cycle. Although this is an important indicator, things are a lot more complicated. The potential for a Greek default, and a sluggish economic recovery are causing a lot of fear in the global markets and buyers are not keen to get back in the markets.
In order to get a better understanding of where the markets are headed, I sat down for an interview with Bill Lupien, one of the most experienced and well respected traders in the industry.
Bill Lupien is an influential investor with a long and distinguished career in the equity markets. He was the CEO of Instinet Corporation, and was responsible for Instinet's move to trading Nasdaq stocks. He has served on numerous private and public company boards including Mitchum, Jones & Templeton, Instinet, National Health Enterprises, Energy Metals Corporation, Uranium One, Midway Gold, Potash One, EMC Metals, Beaufield Resources, and others. He also held a position as Trustee of the Securities Industry Institute and the Securities and Exchange Commission National Market Advisory Board as well as being a Governor of the Pacific Stock Exchange for 6 years. Bill is the co-author of "Market Evaluation and Analysis for Swing Trading" which was published in 2004 by McGraw Hill. He is also the co-inventor of the OptiMark Trading System.
TB: Bill, there is a lot of fear in the markets, and we are in the midst of a deep pull-back. Have you seen markets like this before?
BILL: This is nothing new. Markets always go through these cycles, it just so happens that the fear is riding higher than the greed at the moment. The causes for fear may be different, but it is certainly nothing new.
TB: Where do you think the markets are headed?
Bill: Junior miners are oversold. They may trade sideways, but we won't see the same selling pressure we saw in 2008 when there was a lot of heavy, forced liquidation. People are not forced to liquidate now. The market is oversold and with any kind of relief the market will go higher.
TB: What do you think about the timing. Usually the summer pullback ends in the latter part of the summer?
Bill: I am not really a calendar guy, except for the tax loss selling season. I mostly just trade them as I see them. Right now I am seeing a market that is near the bottom and it is probably a good time to buy. Every once in a while we get a sale which presents us with a good buying opportunities. 2008 was probably best buying opportunity, opportunity of a lifetime in fact, where we witnessed heavy liquidation for months on end. What we're seeing today is a pullback, but it is not nearly as severe as what we saw in 2008.
TB: What is your market strategy now?
Bill: Well, I am always in the markets. This way I always maintain a feel for what is going on. I have my catcher bids out there now, but there isn't much aggressive selling out there. If people want to sell they'll find them.
TB: What sectors do you like, and is there anything you're staying away from?
Bill: I am staying away from uranium stocks. I think the selloff in uranium stocks will continue till the tax loss season. The Japanese nuclear disaster has really put a damper on the sector. I also think the overall REE market is still looking weak. I like the base and precious metals. Anything that is a hard asset really. You see, governments continue to debase their currencies for competitive positioning from the trade perspective, this means that the real value can be found in hard assets. Outside the stock market I've diversified into agricultural land, I now own two ranches.
TB: What about the tech sector, do you like anything in that space.
Bill: I am not touching it. I am willing to change my mind, and I am watching it, but I think that valuation metrics do not reflect the common sense value of these plays. Investment bankers are wonderful at providing metrics, but I think there's some ignorance value attached to these companies. In five years time the valuations of stocks like LinkedIn, and Facebook will probably be lower than it is today.
TB: What are some of your favorite companies?
Bill: I don't like to suggest particular stocks, simply because I have no way of keeping my audience updated with any changes that may cause a change in my outlook.
TB: What do you look for in picking a company?
Bill: Number one is always management, number two is the sector. It has to be in a growing sector, like the resource or precious metals. The third criterion is the company potential. There are lots of good exploration plays out there, but certain areas seem to attract more attention than others. For example, Yukon is very hot right now, with perhaps several areas in Quebec, and silver plays in South America. Up and coming producers are also worth looking at.
TB: Sama Resources and EMC Metals are some of your investments that I actually follow in the letter, what are your thoughts on these companies?
Bill: EMC has had a gigantic correction, even though nothing has materially changed. In fact things have gotten better with the few past news releases. EMC already has the tungsten deposit and is perhaps 18 months out from Scandium production. I think this is a good investment. Sama resources is another stock that I like. It has pulled back a little, but it doesn't trade much, very low volume.
TB: Parting comment:
Bill: When you are the most fearful, that is the time to buy. That is the best way to make money in the markets.
