ETF Periscope: Gold, Crude & ETFs
Courtesy of Daniel Sckolnik at Sabrient
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”~ Mark Twain
There’s a lot to like about gold at the moment.
That seems to be the general consensus, anyway, which is why gold has been propelled to its current record high, with August delivery settling at $1,258 on Friday. Gold holds something for almost everybody. Momentum traders like it for the obvious trending characteristics it is exhibiting, well on track for posting its third straight month of gains. Those looking for a safe haven far from the volatility of stocks likely don’t need much of a nudge to hop upon this bandwagon for additional acquisition. It serves those, as well, who figure it to be the ultimate inflation hedge.
But has the shiny metal hit its top? At what point will some of the hedge funds with massive holdings in gold ETFs decide to swipe a scoop or two of profits from the bowl? Will gold lose a degree of glitter should the equity markets build upon the week’s solid performance and begin a measure of bull-riding? If extreme volatility returns to the market, will investors retreat back into cash?
As always in the markets, any scenario may play out. Circumstances that could affect the outcome in the short term include the onset of the upcoming earnings season, new signs of weakness from out of the European Union, or a chill sent over Wall Street, courtesy of the Senate’s threat to actually pass a financial reform bill with teeth.
Speaking of the Senate, much attention was given to British Petroleum’s recent grilling in Washington, where BP’s CEO certainly looked the part of a roast left in the oven a little too long. Still, the market’s response seemed to indicate that it had already factored in the inquisition. BP’s stock stabilized above last week’s lows, during which it explored the depths of its stock price, 50% off its two-year highs. The question is, will investors now consider the stock a bargain, or will fear of additional negative news drive “black swan” strategists to short BP’s stock?
For the moment, at least, the markets seem on firmer footing. Support levels for both the S&P 500 and the Dow Jones Industrial Average are being established, with both benchmark indexes now slightly above their respective 200-day moving averages. The DJIA maintains some breathing room above the psychologically important level of 10,000 for the first time in a while. However, it effectively remains stuck in the middle of a sideways pattern that stretches all the way back to October 2009.
What the Periscope Sees
Squinting through the bright reflection that’s bouncing off all that shiny gold, ETF Periscope dons a pair of sunglasses to take a look just beyond the Deepwater Horizon.
My focus remains on last week’s selections, while updating the chart notes as appropriate to this week’s market action.
Staying atop Sabrient’s SectorCast-ETF Rankings is IAI (iShares Dow Jones U.S. Broker-Dealers Index Fund), an exchange-traded fund launched by Barclays Global Investors and managed by Barclays Global Fund Advisors. The fund seeks to invest its corpus in common stocks of companies that form the Dow Jones U.S. Select Investment Services Index as per their weighting in the index and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of that index.
Chart-wise, IAI remains well below both its 50-day and 200-day moving averages, and it still has a way to go before it breaks back through. It continues to hover in the middle of a consolidation range, where it remains above its previous support levels established during February’s lows.
Further down the Rankings, within the top 5% is QTEC (First Trust NASDAQ-100 Technology Sector Index Fund ETF), an equity exchange-traded fund launched by First Trust Virtual Portfolios L.P. and managed by First Trust Advisors L.P. The fund invests in stocks of companies operating in the Technology Sector and seeks to replicate the NASDAQ-100 Technology Sector Index by investing in stocks of companies listed in this Index in proportion to their weighting in the Index.
Looking at QTEC’s chart we see that it continues its flirtation with the 200-day MA, where it remains just atop that key indicator. In addition, it also remains slightly above levels of support established during February’s low point.
Still remaining in the top 15%, is RYJ (Claymore/Raymond James SB-1 Equity ETF), an exchange-traded fund launched by Claymore Securities, Inc. and managed by Claymore Advisors, LLC. It invests in the public equity markets across the globe, in stocks of companies that operate across diversified sectors and diversified market capitalizations. The fund seeks to replicate the Raymond James SB-1 Equity Index by investing in stocks of companies listed on that index in proportion to their weighting in the index.
RYJ’s chart shows that it now has moved up to bump its head against the 50-day MA, remaining a fair degree above the 200-day MA. The ETF has shown the same high level of volatility as the broader indexes, as expected considering its make-up.
From the lower end of the spectrum of Sabrient’s SectorCast-ETF Rankings, about two-thirds of the way down, is IWP (iShares Russell Midcap Growth Index Fund), an exchange-traded equity index fund launched and managed by Barclays Global Fund Advisors. The fund invests in stocks of companies listed on the Russell Midcap Growth Index in proportion to their weightings in the index. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. The fund seeks to replicate the performance of Russell Midcap Growth Index.
I continue to use IWP as a reasonable proxy for the overall markets, and it remains as a valid choice for the purpose of insurance against a downturn. To this end, you could purchase slightly out-of-the-money put options a few months out, or short the ETF itself. As always, the amount of insurance you secure should reflect your virtual portfolio’s overall bias to the long or short side.
ETF Periscope
THE PROCESS
One of the tools I utilize in my assessment process is Sabrient’s SectorCast-ETF Rankings. The Rankings consist of over 340 ETFs (exchange-traded funds) that are ranked and scored via 16 of Sabrient’s proprietary analytics, that, when taken as a whole, offer a forward-looking take on the markets.
My selection process 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.
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 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 invaluable in considering the overall hedging equation. My ultimate goal is to craft a hedged, lower-risk virtual portfolio that helps to protect against the markets’ inevitable gyrations while allowing for upside potential.
Next, I look at the ETF’s chart for technical confirmation. l use support and resistance levels, simple moving averages and a handful of other indicators to help evaluate the market. Finally, I check to see if the ETF offers options, which I frequently use in place of buying shares in an ETF.
In selecting ETFs to cover the short side of my virtual portfolio, I flip the process, scanning the bottom 10-15% of the Rankings and adapting the Bull Score/Bear Score analytic as appropriate.
