It suggests that markets perform better over the winter season, and that investors are smart to sell off over the summer.
There have been numerous studies over the years concerning this phenomenon.
Here is a detailed chart that goes across borders and time and shows that the theory is true:
Of course, this theory would have been a moot point for 2009.
If you sold in May of last year, you would have missed out on one of the strongest rallies in history. The Four Qs (NASDAQ: QQQQ), which tracks the NASDAQ 100, is up 43% since May of 2009.
But this isn’t last year. Everything has changed in 2010.
Last year, we were bouncing back from one of the biggest sell-offs since the 1930s. The fear was so thick, you could eat it. No one wanted to own stocks; in March of 2009, there was no one left to sell.
It was a clear market bottom capitulation.
This year, we’ve had a monster run for two and a half months.
The stochastic is riding the ceiling… The MACD seems topped out… And we are running into several points of major resistance that go back to 1998.
Markets don’t go straight up; earnings season is almost over, and though it was positive on the whole, the good news has been priced in.
The stock market is a leading indicator. It rallied over the last year with the understanding that the recession was ending. Year-over-year numbers have been good because in Q1 2009, they were horrible. The positive earnings numbers have a lot to do with a low hurdle.
But today, if you look out six to nine months, what do you see?
More Wall Street blame and regulation, higher taxes, more government debt, Cap and Trade burdens, Euro debt contagion, increased protectionism, unresolved housing forecloses, climbing interest rates, and a contentious mid-term election in November.
It is true that Wall Street climbs a wall of worry. And the bullish case involves the Federal Reserves keeping interest rates near zero, which in turn creates enough liquidity to inflate another bubble.
But anyone over the age of 30 has seen this movie before — twice.
Above is a ten-year chart of the NASDAQ 100 tracking stock. Each candlestick represents a quarter, or three months.
You’ll notice a couple of things: One is that most up-trends last five candlesticks, and we are now at six on the current market rally. Furthermore, there is significant resistance at 50.65 going back to 2007, 2000, and 1999. And check out that falling volume!
It is certainly possible that the QQQQs will blow through the resistance and never look back. But the truth is stocks don’t go up in a straight line, and trees don’t grow to the sky.
Computer-based program-trading now represents more than 60% of all trading.
Many of these programs that base their trades on support and resistance lines. They become de facto trading rules. The line at 50.65 — the high for 2010 — will be difficult to cross.
Even in 2004, after five positive quarters in a row, we had a significant summer correction. That’s what I’m betting on again this year.
It’s time to take some money out of equities and put it into hard assets.
There is one investment that has gone up, bubble after bubble: gold.
And in fact as I write this, gold has shot up another $25 as S&P downgraded Spain’s debt to double -A, as Greece announced that it needed far more money than previously thought, and as the SEC has taken criminal actions against Goldman Sachs (NYSE: GS).
Gold is now at $1,177 per ounce… and climbing.
You may like gold (and who doesn’t?), but you can make even more money on gold mining companies. Allied Nevada Gold Corp. (AMEX: ANV), which I recommended in December 2008, has been on fire this year — up 758% in 14 months!
From a technical standpoint, the price of gold has been consolidating for a year but has maintained its up-trend. Over the past week, it has broken through resistance at $1,165 per ounce to hit new highs.
The recent string of bad news will give the smart money the impetuous to sell some U.S. and European equities and buy hard assets.
But not all gold companies are the same…
I’ve found one small exploration stage company in the mineral game in Mongolia, the United States, and China. The company looks for copper, gold, molybdenum, and coal.
Its principal property is a 100% interest in the Lookout Hill property, comprising 179,590 hectares located in South Gobi region of Mongolia.
This property surrounds what is billed as the largest gold mine in the world: Oyu Tolgoi.
Furthermore, this $2.81 company has $0.41/share in cash and almost zero debt. They also have built a perfect strategy. Due to downstream deals, they have no upfront costs and make 20% of any value extracted.
According to the company filings:
One deposit hosts a 43-101 compliant Indicated Resource of 117 million tonnes grading 1.8% copper and 0.61 g/t gold, estimated to contain 4.6 billion pounds of copper and 2.3 million ounces of gold and an Inferred Resource of 95.5 million tonnes grading 1.15% copper and 0.31 g/t gold, estimated to contain 2.4 billion pounds copper and 950,000 ounces of gold.
A second deposit contains an Inferred Resource of 760 million tonnes grading 0.48% copper, 0.55 g/t gold and 142 ppm molybdenum, estimated to contain 8 billion pounds of copper and 13.4 million ounces of gold.
If you take just those 2.3 million ounces of gold based on the first deposit, and you multiply it by the current market price per ounce… you get $2,691,000,000 worth of gold.
You multiply this by the 20% the company gets from any extracted value and you get $538,200,000.
This company has a market cap of only $274,000,000.
Note: Copper is priced at $3.34 a pound these days (4.6 billion x 3.34 = $15.36 billion x 20% value =$3.07 billion).
If you completely discount all other values, and just take this one deposit… This company, which has down-streamed all costs in return for 20% of whatever comes out of the ground, and you consider only that mine — without thinking that gold or copper or moly will go up — you should arrive at this conclusion: this company is easily undervalued by half.
If you consider it is a well-funded and connected global exploration company that is sitting on mineral rights all over the world, including in the United States, China, Canada, and a huge plot right next to what is considered the largest unexploited gold mine in the world…
All of this gives you little risk and tremendous upside.
The key catalyst for hitting the double digits is the mining plan now being worked out with its partners and the Mongolia Government.
I was in Mongolia a few months ago and spoke with the decision makers in government and business, including the top people who worked out the OT deal.
Everyone I spoke with wants these mines up and running as soon as possible. They expect official clarification this summer.
But even without the official go-ahead; if gold trends up toward $1500, I expect this small-cap gold explorer to fly.
If both happen, you are easily looking at a $10 stock.
And as a bonus, it trades on the American Stock Exchange — so, no muss, no fuss.
Read more about the profit-multiplying formula could hand you 57 times your money — but only if you follow these instructions by today, April 30th.
You don’t want to wait on this one.
All the best,
Energy and Capital
P.S. My associate Greg McCoach recently found one for the books… 510 miles north of Akron, in a region home to one of North America’s most abundant gold deposits, the most shocking land-grab of the past 50 years is quietly yet rapidly unfolding.
In short, thanks to one uranium giant’s neglected assets, a tiny exploration company recently secured several billion dollars worth of gold — for just $250k. Read more about how one company’s multi-billion dollar goof just created the easiest gains you’ll make this summer.