Wednesday, August 10, 2011
"It's tempting for us to walk around and feel like geniuses..."
I issued this warning to you in December 2010. Back then, commodity prices were soaring. Crude oil was at a new 52-week high. Copper was up 33% in 12 months... and sitting at an all-time high. Gold and silver were near all-time highs. Most agricultural commodities were at 52-week highs.
The bull market was drawing in a tremendous amount of money, and commodity investors were looking at amazing gains...
But as I explained in December, "In the resource investment business – which produces enormous booms AND enormous busts – simply counting your money and feeling brilliant, while ignoring risk, is a recipe for disaster."
So we prepared ourselves for both a boom and a bust. I hope you took my advice then. But even if you didn't, it's not too late. Let me explain...
Back in December, we knew the bull market could go hundreds of percent higher. So we didn't want to close our positions. But we couldn't ignore the risk... So we tightened our trailing stops. That gave us room to run higher and install an "eject button" that would protect the winnings we had.
It turns out, things did have higher to go. Crude rallied another 37% to its peak. Copper prices soared over 30%. The entire commodity complex, measured by the CRB Commodity Index, rose 28%.
Today, things have changed. The price of crude oil fell almost 20% in just two weeks. Copper is down 15% from its high. The CRB index is down 14%. Resource investors are getting hammered.
But if you stuck to the plan I laid out, you made plenty of money... and are likely back on the sidelines. Here's a good example of how well the plan works...
In February 2010, we bought Carbo Ceramics for the S&A Resource Report portfolio. This company makes a special product used to drill for natural gas and oil. Take a look at a chart of the company's performance over that period.
It's a beautiful chart. At its top, the stock traded for $180 per share. We were up almost 200% on the trade. As shares soared, we tightened our trailing stop from 25% (our original position) to 15%.
The recent action dropped the shares as low as $120. But our tighter stop got us out at $154, for a 142% gain. If we'd held, we would have seen half of our profits evaporate.
So if you're holding onto failing resource investments, figure out your stops and honor them. In my advisories, we've got tighter-than-usual stops, and we're watching them closely. Otherwise, we're waiting out this period of volatility.
Like I said, resources boom and bust like crazy. This bust will turn around and boom again. When it does... and you're sitting on hundreds of percent gains... you'll probably feel like a genius. That's fine. But don't forget your stops.
Sticking to your trailing-stop discipline is one of the keys to "playing great defense"... Get more defensive strategies here: What 23 Pages of Paranoia Taught Me About Trading.
When you get a big winner, tightening your stop is a smart way to protect the gains you've made. In this classic Growth Stock Wire essay, Brian Hunt shows you the right time to change a stop loss.
S&P 500 tries to break its downtrend... posts biggest one-day gain in more than two years.
"Safe havens" continue to rise... gold and Swiss franc touch fresh record highs.
Natural gas remains in an uptrend... prices are still well above March lows.
S&P 500 is doing better than other global indexes... Brazil's Bovespa, Hong Kong's Hang Seng, and Germany's Dax are all down more than 20% from their highs.