ETF Update: Safety in Gold Stocks?

Investors who monitor market sectors have a big advantage.  They avoid the narrow focus of individual stocks.  More importantly, they find opportunities when the overall stock market is range-bound.

This is an important lesson.

Even when the market seems neutral or negative, there may be strong trading opportunities.

We study sectors continually, looking at the charts and ratings of hundreds of ETF's.  Each week we provide a list of our top-rated sectors for the next thirty days, along with some of our current observations.  ETF investors can check out the list and compare our findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of Anticipation.  Since we apply
the model to nearly 300 ETF's, we call it the TCA-ETF system.  (For new
readers, there is a more complete description of our methods at the end
of the article.  We also have a free report with more detail on the system and results, available on request.)

The Macro View

From an overall market
viewpoint, our indicators remain in neutral territory with a negative lean.  The key elements are as follows:

  • While 71% of sectors have a positive rating, it is a very weak positive.  The average rating for the overall list is 7.  (0 is average for the long-term ETF expectancy.)
  • 87% of our sectors are in the "penalty box."  This means that they are currently disqualified from the buy list for technical reasons.  You can think of this as a sophisticated "stop loss" rule, often applied in advance.
  • Our index package is neutral.  For this rating we look at the ETF's (both long and short)  for the S&P 500, the Dow, and the Nasdaq,  There is a slight long lean, but the overall rating is nearly neutral.  You can see these ratings is the results table for this week.

The Spotlight

Even when the overall market is neutral or range bound, there are often promising investments or trades in specific sectors.  This week the sector spotlight features gold and mining stocks.  We are trading this via two different ETF's.

We often buy the Market Vectors Gold Miners ETF (GDX).  This is a concentrated ETF, with 45% of the holdings in the top five companies.  Here is a look at the GDX chart.  Even amateur chartists can see a breakout to new highs.


GDX zoomed from #35 in our ratings to #1.

Another interesting choice is SPDR S&P Metals and Mining ETF (XME).  This choice has a more diversified selection of stocks.  The top holding include general mining stocks, not just gold, and the concentration is much lower, at under 25% for the top five.  Our ratings are a bit lower, but we also own this ETF.  Here is the chart.


It also shows a nice breakout.

Pundit Comments and Fundamentals

We always review fundamental factors in sectors that we own.  There are a few noteworthy comments from colleagues.

The big news of the week was that Barrick Gold (ABX) was unwinding some old hedges.  At the risk of oversimplifying for readers, this means that Barrick was trying to manage earnings by selling forward contracts in gold.  Since gold has moved much higher, these decisions now seem to be incorrect.  This smacks of second-guessing, since the company is trying to stabilize earnings for investors.  No one knows for sure where the market will go.

It does illustrate an important point for investors.  The mining stocks are not always a pure play on the commodity.  Our model does not evaluate commodities, so this is an important distinction to consider.

Here are some observations on gold, and the hedging issue:

  • Felix Salmon, one of our featured sources, is critical of the Barrick decision.  It seems a bit like second-guessing to us, but it raises an interesting question.  Investors wanting a pure play in gold do not always get it with stocks.  It is important to understand the companies.  Our method, of course, looks across the performance of many companies.
  • Will unwinding hedges pressure gold stocks?  It is important to realize that counter-parties have also hedged, as this source explains.
  • Blogging Stocks does not like the Barrick move since unwinding the hedge dilutes investors.  It is an interesting viewpoint, affecting one of the key stocks in the ETF.
  • Tom Lydon, one of our authoritative sources on ETF's, takes a look at the overall market and compares stocks to commodity ETF's.

These are all great observations to consider.  We do not evaluate commodity ETF's since the properties are so different from the stocks.

Weekly TCA-ETF Rankings

(versus 82% last week) of all sectors are now in the penalty box,
having violated certain technical criteria.  Our index package (near
the bottom of the table) shows that the longs and shorts are close to even.

We had a nice gain of over 2.5% last week, in line with the S&P 500.

Based upon the current model signals, we have continued our neutral position in the Ticker Sense Blogger Sentiment poll.

the top sectors from our expanded universe of 277 ETF's.  The list
also includes the values for the broad market ETF's and their


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.

You may also like

One comment