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Are You Digging Gold About Now?
by Daniel Sckolnik of ETF Periscope
“I think it’s wrong that only one company makes the game Monopoly.” ~Steven Wright
Is it time to get out the shovel and dig into gold?
The lustrous metal, which is regarded by investors with a wary eye almost as often as lust, has been rebounding nicely as of late. From its lofty perch and all time high of $1,261 in June, it took a serious swan dive into a shallow pool by the end of July, experiencing a sharp 8% degree of correction. Gold skeptics nodded their heads in their best “I told you so manner,” assured that it was heading back down to the dark place where it belonged, though nobody seemed quite sure as to where that place might be.
The worm, however, may just have turned. Gold gained 1.8% this past week, slow but steadily. Gold futures for December delivery, the most actively traded contract, ended up at $1,205.30 an ounce, with the $1,200 price acknowledged as a prime level of support.
The markets in general were somewhat less consistent. After Monday’s initial pop, which saw the Dow Jones Industrial Average shoot up over 200 points and the S&P 500 Index rally past its love affair with the 1100 level, the remainder of the week saw the markets treading water. Only a late push on Friday kept the major indexes in the black for the week, no mean feat considering the initial response to the Labor Department’s nonfarm payroll report. The fact that 131,000 jobs were lost in July caught the prognosticators by surprise, and the DJIA reacted with a triple-digit drop, most of which was recovered by market closing.
But what about gold?
It would not be inaccurate to say that it has acted somewhat erratically as of late. Generally, gold moves up when the US dollar goes down, and down when the dollar is up. However, this has not quite been the case for much of this year. Is it because of the large quantities accumulated by hedge funds as straight investments, as opposed to the more traditional “safe haven” buying? Has the renewed interest in piling up the yellow metal by the world’s Sovereign Funds impacted the picture in any significant way? Whatever the cause, it seems as a somewhat different paradigm is beginning to emerge around gold and the dollar, with the outcome impossible to predict.
So is now a good time to dig gold?
If you sneak a peak at the charts, a few hints may emerge. I’ll use GLD, (SPDR Gold Trust) which tracks gold bullion, as the proxy for gold. (There are other gold ETFs that can serve a similar purpose, such as IAU [iShares Comex Gold Trust] and PHYS [Sprott Physical Gold Trust], though of the three, GLD has the largest market cap and average daily volume by large multiples.) GLD has effectively been traveling sideways since May, and is now about midway between its June highs and July lows. GLD tapped on the ceiling of its 50-day moving average on Friday, and if it can break on through to the upside of that resistance level, it has a good shot at retesting its all-time highs. Should that indeed occur, it likely would happen over the next few months, taking advantage of the higher volume that tends to return to the markets in September.
The thing about gold is, you can use it in your virtual portfolio in a number of ways, including as a potential inflation hedge. The other thing about gold is, investors are utilizing it in new ways and in larger quantities via the various new ETFs, perhaps impacting the old price patterns. So historical charts might be useful as a roadmap that leads you to the treasure, or maybe just as a reminder of correlations past that now are as useful as a pocket of fool’s gold.
What the Periscope Sees
Like a connoisseur perusing a wine list for just the right bottle to suit the food selection, ETF Periscope scans Sabrient’s SectorCast-ETF Rankings for a few good matches that meet the current landscape of the markets.
As per the usual order of the day, I’ve chosen a duo of Bullish selections and paired them up with two Bearish choices. A little something for both the upside and downside, “match and mix” as per personal preferences.
Within the top 10% of the Rankings we find IYG (iShares Dow Jones U.S. Financial Services Index Fund), a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. financial services stocks as represented by the Dow Jones U.S. Financial Services Index. The Fund’s major holdings include Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, U.S. Bancorp, American Express, Bank of New York Mellon Corp, VISA, and PNC Financial Services Group.
A glance at the charts shows IYG sits atop its 50-day moving average, having ended the week with a slight bounce from this point. It is the third time in the last two weeks that this MA has served as support, so it may be ready to go vertical.
Going deeper to the bench, FXH (First Trust Health Care AlphaDEX Fund) is an exchange-traded fund that replicates the StrataQuant Health Care Index by investing in the securities that comprise the Index, and seeks investment results that correspond generally to the price and yield, before fees and expenses, of that Index. The StrataQuant Health Care Index is an “enhanced” index developed, maintained and sponsored by the NYSE Euronext or its affiliates, which employs the AlphaDEX stock selection methodology to select stocks from the Russell 1000 Index.
As of Friday, FXH recently broke through a convergence of its 50-day and 200-day MA, where it is currently perched. The last several market sessions have found this Health Care sector ETF consolidating at this support level, and an upside move may be in the works.
For the short side of the equation, here are two selections that warrant consideration, both buried way down the list at the bottom 10% of the barrel.
GDX (Market Vectors Gold Miners ETF) is an exchange-traded fund that invests at least 95% of its total assets in stocks that comprise the NYSE Arca Gold Miners Index. The Fund provides exposure to publicly traded companies worldwide involved primarily in the mining for gold, representing a diversified blend of small, mid and large capitalization stocks. Only companies with market capitalization greater than $100 million that have traded an average daily volume of at least 50,000 shares over the past six months are eligible for inclusion in the Index. The Fund seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index.
Going even further down the list, we come across XHB (SPDR S&P Homebuilders ETF), an exchange-traded fund that invests in stocks of companies operating in the homebuilding sector. The Fund, before expenses, seeks to replicate as closely as possible the performance of the S&P Homebuilders Select Industry Index, an equal weighted market cap index which represents the homebuilding sub-industry portion of the S&P Total Market Index.
I am using both XHB and GDX to accommodate the short side of the market equation. You may choose to acquire slightly out-of-the-money put options a few months out, or you might decide to short the ETFs themselves. Exactly how much downside “insurance” you choose to secure is a question for you to decide, reflecting your overall market bias as well as your risk-management strategies.
ETF Periscope
The author does not personally hold any of the stocks or ETFs mentioned in this week’s “What the Periscope Sees.”
The Process
For myself, as always, I look to Sabrient’s SectorCast-ETF Rankings for some effective insight. The Rankings consist of over 340 ETFs (exchange-traded funds) that are ranked and scored via sixteen of Sabrient’s proprietary analytics, that, when taken as a whole, offer a forward-looking take on the markets.
My process in selecting from among the SectorCast-ETF Rankings includes scanning the top 10-15% of the current list, which is updated three times weekly. I’ll limit my choices to one ETF per sector, in an effort to achieve a healthy level of diversification.
Among the analytics that I pay particular attention to is what Sabrient terms “Bull Score” and “Bear Score.” The Bull Score offers a “technical” measure of how underlying stocks performed on “up days” in the broader market during the last two month’s action. The higher an ETF’s Bull Score, the better it has performed on recent up days in the market. The flipside analytical, Bear Score, indicates the reverse. The higher an ETF’s Bear Score, the better it has performed on recent “down days” in the market. A high Bear Score implies a “defensive” ETF.
For me, the Bull Score and Bear Score are among the tools that I incorporate into the overall hedging equation. My ultimate goal is to craft a hedged, lower-risk virtual portfolio that protects against the markets inevitable gyrations while continuing to allow for upside potential.
Next, I’ll look at the ETF’s chart, seeking divine inspiration, or, failing that, at least a high level of technical confirmation via support and resistance levels, simple moving averages, etc. Finally, I’ll check to see if the ETF offers options, which I frequently use in place of buying shares in the ETF itself.
In selecting ETFs to cover the short side of my virtual portfolio, I’ll flip the process, scanning the bottom 10-15% of the Rankings and adapting the Bull Score/Bear Score analytic as appropriate.
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
