ETF Update: Gold Mining Shines in a Tough Week

Last week's market action has some important and interesting messages.  We see rapid sector rotation, with a dramatic fall in some of last week's leaders and soaring ratings for new choices.  The overall market rating is mixed — still bullish, but lacking the strength of recent weeks.

We look beneath the overall market averages to find sector strength in our universe of 57 ETF's.  The strength may be momentum-based, reflecting recent Trends, or it can represent part of a Cyclical pattern in the sector.  The process adds a touch of Anticipation, so we call it the TCA-ETF system.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Falling Sectors

Home Construction (ITB) plummeted from #4 last week to #51 and a place in our "penalty box."  Networking fell from #6 to #44, and also went to the penalty box.  These are extremely rapid one-week moves.

Market Averages

While the model retains bullish ratings on the S&P 500 and the Dow, the Q's are in the penalty box, as is the inverse ETF, the PSQ.  This is a neutral rating on the Nasdaq.

Spotlight on the Gold Miners

The ratings star of the week was the Market Vectors Gold Miners ETF (GDX), shooting from #46 to #5 in our ratings.  We last featured GDX in November.  That article pointed out the low concentration (37% in the top five holdings), the heavy Canadian exposure (67%), and the low correlation with the S&P 500.

Part of our analysis was the advantage of taking gold stocks rather than the metal.  We are not going to repeat the entire argument, so take a look.

Here is the chart.


Fundamental Analysis on Gold

There are several distinct viewpoints on the current attractions of gold stocks.

  • One camp predicts that current government policies will inevitably lead to inflation.  Tom Lydon summarizes those views and some alternative investments.
  • Maoxian points out that the astute hedge fund manager, John Paulson, has been accumulating a gold position, including GDX.
  • James Kostohryz takes a different viewpoint, although he still sees the potential for short-term gains.  He writes as follows:
…gold is moving from being traded as “safe haven” play and is gaining a
bit of traction as a “reflation play.” Notwithstanding, it is important
to note that even within the context of the broader reflation play,
gold and gold stocks have badly underperformed other commodities and
commodity stocks.

I do not think gold will rally very far
based on concerns about inflation. The reason is simple: The arguments
offered by gold bugs for hyperinflation or high inflation, are
empirically and even theoretically unsound. There is minimal risk of
significant inflation occurring any time within an investment horizon
that can be considered to be highly relevant to the market (1-2 years).
Thus, as the data roll in, and this reality sinks in, gold will lose
its appeal as a supposed inflation hedge.

It is always interesting to see divergent viewpoints and explanations.  For the moment, we are once again buyers of gold miners via GDX.

Weekly TCA-ETF Rankings

45 of
57 sectors are in the
"buy" range.  While a few sectors have extremely strong ratings,  the
overall picture is much weaker than it has been in recent weeks.

daily portfolio lost about 9 percent on the week, with the S&P
500 down about 5 percent.  This reflects the rapid nature of the rotation, and the fact that the system does not call "tops."  We do exit when a sector moves into the "penalty box." 

We traded out of two positions on Friday, the day after the regular ratings update.  There is a reason for publishing this as we do.  The ETF Update is designed as news information — something to augment the trading ideas of our readers.  For accounts that we manage, we run the model at least twice every day.  Even for those in the weekly programs we may adjust at mid-week.  Those who really like the concept should call us to discuss our program.  We are not suggesting that people should read our weekly ratings and make their own trades, strictly on this basis.

Based upon the model signals, we continue our official bullish
position in the Ticker Sense Blogger Sentiment poll.


Note for New Readers

Our weekly ETF Update is designed to assist both investors and
traders interested in ETF's and Sector Rotation.  Before turning to the
current rankings, let us undertake a review for readers new to this

Our Method.  In this past article,
we described our basic methodology and why we believe the rankings are
useful for fundamental traders and technical traders alike.  While we
urge readers to check out the entire article, the key point is that
ETF's pose challenges and opportunities different from investment in
individual stocks.  The fundamentals may be more difficult to assess. 
Even with a good grasp on fundamental trends, there is a lot of
technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis.
We look at Trending sectors, Cyclical Sectors, and build in an element
of Anticipation for both entry and exit — thus the name of the model,
TCA-ETF.  While we do not reveal the exact methodology for spotting
trends and cycles, the system is not a "black box."  The basic elements
are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings
each week, now on the weekend with a one-day delay, using the Thursday
output from the model.  We monitor and trade this daily, and offer a
free report (request via the email address on the top left of the site)
for those interested in our weekly trading program.

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  • financial planner May 19, 2009  

    Our firm matches investors to financial advisors and we are definitely seeing more interest from both sides in gold. This is also an area in which people aren’t just looking at what did well (relatively) last year, but are looking at massive government spending for the forseeable future and being proactive, maybe even early, to invest in gold.

  • Health Insurance Guy May 20, 2009  

    Commodities will soon soar the way the govt is printing money. Inflation is really inevitable and oil, gold, copper, even silver will all spike in the near future.

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