Tuesday, February 22, 2011

Precious Metals Need Your Attention

  • Macro Indicator:  the GGT database is expanding in the number of stocks with a LONG status.  This means that more stocks are appreciating and seeing increased volume than those that are decreasing in price.  This is bullish (a rising tide lifts all boats).
  • Macro Indicator:  the Elder 13d Force Index (FI) system, as applied to the GGT universe, is bullish and at the present daily rate of change, is about 6 days away from any form of sell signal.  The probability of a sustained down leg is smaller than the probability of a continued up leg, so we are carefully bullish.
  • Due to personal events and subsequent travel, I liquidated a large portion of my short-termed holdings last Wednesday because I was unable to attend to them Wednesday, Thursday, or Friday, and the uncertainty of world events made holding them over the weekend dangerous.  I'll be moving back into selected positions as the week unfolds, provided that the markets do not dive from their lofty levels.
  • The GGT Price Accumulator Change tool is mid-scale/neutral at a value of 0, which is neither oversold nor overbought.  Risk/reward is literally a 50/50 coin toss from here, compared to past buying opportunities.  This means that we can buy stocks here with a reasonable expectation of them going either up or down (as opposed to buying when they are oversold).  Of course, we must be selective, and we must watch where the money is flowing.

GGT New Longs - ETFs

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I want to highlight a GGT New Long, as the timing here is important:

  • GLD is the most liquid of the New Longs, and reflects continued buying into the equity over the past week or so.  Note that acquisition volume was large on Friday in GLD, which is important.  I also note that GLD is 0.8% over my buy limit, so I'd like to see it come back a bit.   The question is whether we should be considering precious metals at this point in time.

The figure above is a total EV view of GLD, the physical gold ETF, from the Effective Volume site.  Note that the average EV has a positive slope and that TEV is above this level.  The value of -8,000 tells us that while GLD is still being distributed on a day-for-day basis, the sell-off is decreasing day over day, e.g., we are lessening the bleeding, and if the trend continues, we'll wish we bought at these levels.

To answer the question on whether we should buy GLD, we can look at the precious metals sector as a whole in terms of money flow.  Again, the chart is from Effective Volume:

Here, we see a number of key items:
  1. the slope of the 20d average of money flow into the PM sector is positive, which means that day-over-day, more money is flowing into the sector as a whole that was yesterday.
  2. the 20d average of money flow (MF) just moved above the 0 line -- the bleeding has stopped and the PM MF is a net inflow.  This is good in general for precious metal stocks, and we can conclude that this sector is expanding
  3. The percentage of MF into this sector is pointing upward, parallel to the 20d average.  The conclusion is that both are increasing, which is bullish for this sector.
While silver is not on the New Long list, silver has been outperforming gold for a number of months:

 A linkable version of the chart above can be found here.  The figure above is a ratiometric analysis of silver (SLV) compared to gold (GLD).  Because GLD is in the denominator, the fraction is smaller due to the underperformance, relative to SLV.  Furthermore, I've plotted the 5d EMA on the ratio, and we see that any time the ratio drops below the 5d we've had a good opportunity to jump in.  The present value here suggests we should wait to move into SLV or GLD, but that is an individual decision.  Scaling in would most likely be prudent at this point in time.

Given that SLV is outperforming GLD, let's have a look at the TEV:

    Here, we see a large diversion of the actual total effective volume away from the moving average, which suggests that SLV could be overbought.  This being stated:

    1. the 20d TEV average line is pointing upward -- this is bullish
    2. the TEV level is above the 20d TEV average, which is bullish
    3. both lines are becoming less negative in volume of shares/day, which is bullish.
    World events not withstanding, money flow into GLD and SLV is increasing, as are their prices.

    Stocks in this gold/silver space that I like are the following:
    • UXG - saw a massive amount of buying on Friday, but has been in a general LEV down trend for the past few days.  The risk/reward ratio, as determined by the active boundary (AB) calculation, is very good.
    • AZK - lumpy LEV pattern, but clearly has been experiencing some short-term accumulation.
    • GOLD - new LEV accumulation pattern that meets my 3-day criteria.
    • HMY - new LEV accumulation pattern that meets my 3-day criteria.  
    • GFI -- has a nice lower-left/upper-right short term LEV accumulation pattern, and the AB reward/risk ratio is in my sweet zone.
    In the silver stock area, the reward/risk on SSRI, coupled with the newly emerging LEV accumulation pattern, makes this a good risk if this sector continues to move upward.


    Other GGT New Long ETFs that are being considered are:
    • EEB -- this is a BRIC ETF, and while not a stellar performer, it certainly is showing accumulation over the last week.  Note that the BRICs have been out of favor in general, so this could be the start of a new up leg.
    • MINT -- this is the PIMCO Enhanced Short Maturity Strategy Fund, and has been seeing some solid accumulation over the last few days, as well as the corresponding price performance.  As a fund we have to be careful, as the price is not tied to the movement of volume, but TEV attractiveness is important as it shows the money flow.

    I want to present another chart which shows that market sentiment is tiring as far as this bull is concerned, and we are seeing an increase in expectation of a downtrend:

    This chart is another ratiometric chart that places the mid-term futures (VXZ) against the short-term futures (VXX).  The short-term futures value is located in the denominator, so as it grows larger, we see that the ratio gets smaller, creating the toppiness.  What is important to me is the diving of the slope of the 34d EMA of this ratio -- you can see this on the bottom of the panel.

    What should be evident to you is that short-termed expectations are becoming more bearish at a rate faster than longer-termed expectations, and this indicator alone shows that we are below the levels that we experienced in late August.  This is noteworthy, and is indicative of what we are seeing in the options market (as well as the equity market).  Play this accordingly.


    Given the turmoil in the Mediterranean, I'll hold off on my review of attractive stocks, as this all could change in the next few days if the markets oversell.


    Remember, you are responsible for your own investment decisions, and I am not.  Please do your diligence, and please take ownership for your actions.



    Position disclaimer:  I own or influence positions in the following equities:  EFA, SPY, VXF, SSO.