This should be a correction

Back in Nov, I thought we would have a correction, but we did not. With major indexes sinking again, I feel that the much awaited correction may finally arrive. For this reason, I have exited my various holdings, some even at a loss. This is because I truly feel a correction. The last time we had one was way back in May last year. But, I will be making use of the opportunity to collect shares "on the cheap". However, it is increasingly difficult to do so, as shares are all quite expensive.

But, who knows, this correction may throw up wonderful opportunities. This stance is consistent with an article in today's Straits Times that "traders are viewing any correction in stock prices as an opportunity to buy shares at lower prices. As was evident last year, the key to success in the grind higher is to buy the dips, but not to chase the rallies too hard." The key is to act against all instincts to buy when the everyone else is selling. As Jim Cramer says "When they throw a sale at Macy's, you buy more stuff. You don't panic and run screaming from the mall."

But, just make sure I don't end up buying stuff you do not need. Remember Wilmar.

I have exited
Genting for 7% gain bot 2.03 sold 2.18
Noble for 11% gain bot 2.05 sold 2.28
Olam for 6% gain bot 3.06 sold 3.24
STX OSV for 34% gain (50% exited) bot 0.79 sold 1.06
China Construction Bank for 0 gains bot 7.07 sold 7.13 (nothing left after commissions)
Wilmar for 5% loss. bot 6.01 sold 5.70

The holding period for all of the above is slightly > 1 month.

My existing current portfolio consists of:
BAC
STX OSV
Gold

I have not bought more gold

Although I am seriously thinking of buying more gold, I have not done so. After having done some calculations, my investments in gold did not make me good profits. This is because of the exchange rate loss. I bought gold in Jan 2010 at US$111. It is now US$134. Taking into account exchange rate loss(my home currency is S$), my total gains, based on 40 shares, is just $600, a 10% gain for 1 year of holding. Not exactly exciting returns.

Alexander Green, in his Investment U newsletter, also warned, "If you pile into the barbarous relic at these prices, you may get the same shellacking that Internet investors and real estate speculators got a few years ago." He also advised, "But if you own gold purely for speculative purposes, do yourself a favor. Take profits now."

Therefore, no more adding to my existing holding for now.

Why there may be opportunity to collect more gold

Gold has dropped for a fifth straight day, the longest losing streak since August 2009, as signs that the U.S. economy is recovering strengthened the dollar and curbed demand for a haven. Does this mean the end of gold's bull run?

The following is extracted from Profit Confidential:

Gold Bullion per Ounce
Dec. 31, 2002 $348
Dec. 31, 2003 $416
Dec. 31, 2004 $438
Dec. 31, 2005 $519
Dec. 31, 2006 $638
Dec. 31, 2007 $838
Dec. 31, 2008 $889
Dec. 31, 2009 $1,097
Dec. 31, 2010 $1,421

Well, as we can see, gold has been on a nice uptrend for the past 10 years. We know that it takes a long time for a trend to change. So, the time to buy more gold may be near.

Why we should be cautious on the stock market

Dr YC Chan has proclaimed that the "stock market may be volatile this year, but on the whole should be better than last year." This is due to improving corporate results, blah blah blah... Will this be true? Let's be a little contrarian..

The S&P 500 is up 86% since March 2009. The easy money in the stock market has already been made. Now, the prevailing consensus is that the worst is over for the U.S. economy and that stocks will have a great 2011. But, we know that the stock market always delivers the opposite of what is expected of it. In 2009, everyone was scared stiff of stocks. Yet, stocks gave us its best returns. Currently, too many investors, advisors and analysts have turned bullish on the stock market.

According to Michael Lombardi, "The year 2011 will be treacherous for investors. I don’t expect to see the gains of 2009 and 2010 repeated. I do see the bear’s ugly head returning amid a sea of rising optimism". Michael Lombardi, in his newsletter "Profit Confidential" urged everyone to jump into stocks in 2009, so his credibility is for all to see.

I am not sure if I should share his pessimism, and will continue to trade/ invest using my system until it fails me. Currently, I am still profitting from the upward trend, although I could feel the market tiring. But I do agree with Lombardi that there will come a time when the bears start taking over again. When will this happen? I have absolutely no idea, but should this unavoidable eventuality happen, I want to be prepared for the opportunities that come with it.

China to rebound?

Investor Mark Mobius and Ms Jing Ulrich, chairman of China equities and commodities at JPMorgan Chase, say China's stocks are set to rebound because the government will keep inflation under control. This is in contrast to some opinions that China's stock market could "crash" soon. (see my earlier article "Should we exit China?"). Definitely good news to China investors like me.

A Jan correction?

Just like Jan 2010, the stock market is running up very fast in the first week of Jan 2011. It should correct soon, this month, according to Marc Faber. According to him, however, it should represent another opportunity to buy. Faber prefers energy companies and speculative stocks such as home builders and even AIG. He goes on to say that the third year of a Presidential cycle is very good for speculative stocks versus traditional blue chip value plays.

Specifically, Exxon Mobil (XOM), Hess (HES), and Chesapeake Energy (CHK) are Faber's key picks. Additionally, Peabody Energy Corporation (BTU) on the coal side and Cameco Corporation (CCO) for uranium should outperform over the next few years.

Faber also thinks the S&P 500 will outperform emerging markets in 2011.

My 2010 performance

It is good to keep track of my portfolio at the very start of the new year. For 2010, my performance can be said to be akin to Dr. Jekyl and Mr Hyde. My first half performance was erratic and poor, my second half performance much better, after I changed my mindset to an investing mindset. A breakdown of my performance:

Jan - Jun: -17% loss
Jul - Dec: +54% gain
Overall gain: +37% gain

I am decidedly happier with my performance from the second half onwards. I am finally seeing light at the end of a long tunnel.