Note: This post should be read in the context of the blog entry immediately preceding it. To get the full picture of my views on the current market and a transparent view of my on-going development of this System, please read the first blog entry on this date and then read this post-mortem.
June 7th and 8th were significant downside days for both GLD and SLV. Erasing the recent gains in SLV and putting GLD down by about 3% in the latest cycle instead of flat as it had been up to June 6th. In the grand scheme of things, not huge moves but frustrating to watch having finally shown some strength in recent weeks after a rather long period of sideways corrections in both metals.
As indicated in the preceding post, the Allocation System was beginning to signal a possible shift but given the small gains at that point in time and outlook, I did not want to act "too early" and possibly create more trading activity than I would otherwise hope-for. In a system such as this, there will always be a constant tension between two methods or market approaches: On one end of the spectrum, this is mostly an intermediate and longer-term trend-following system. As such, it should not require frequent trades and portfolio changes by the investor (without diverging here into just what "frequent" means). At the other end of this theoretical spectrum, is more active market-timing and trading. Generating more frequent market signals and requiring more active trading from the investor.
In retrospect, June 7th may have been a good day to have declared a "First Silver Sell Signal" (earlier posts provide more details but generally speaking, such a signal would be to take profits in one-half of the SLV position). But given the market outlook and expected seasonal choppiness and volatility, I didn't think the gains as of June 6th merited incurring trades attempting to lock-in the minor advantage. A tough decision to make.
The coming trading days will likely be just as tough or more so. Some current signals could indeed be interpreted to indicate taking profits and becoming much more conservative. While others indicate we are very near an intermediate bottom in the market and that patiently riding-through some short-term volatility will likely be rewarded with a solid uptrend to follow. From a long-term bull market perspective, both Gold and Silver are down at price levels of major support. So selling would seem premature. However, if both metals can't hold at such support levels, then the correction may become more severe calling-for sales to protect longer-term profits.
This isn't all that unexpected given the massive gyrations in all investment markets right now. The past two trading days--June 7th and 8th--saw large price swings in U.S. and global stock markets and the prime mover in the markets has been a major trend-reversal in long term U.S. interest rates. U.S. Treasuries blasted-through the 5% level (falling bond values) and there is significant bond portfolio adjustment taking-place in response to the difficulties in the U.S. Mortgage Market. Short rates are not increasing at the pace of long rates or they are even showing declines. The Yield Curve is becoming less inverted. And risk spreads between Sovereign debts and private debt (Corporates and Mortgages) are increasing. The results of markets "priced for perfection" are finally, apparently, being reaped. Given the massive size of the Global Bond Markets, when such large changes take-place, the ripples move through all other markets. Equities, Commodities, Real Estate, you name 'em. Normally during such volatile markets one would see intermediate to long-term U.S. Treasuries to rally on the reflexive "flight to quality" but as the reader should know, my outlook is not that U.S. debt instruments reflect their traditional "quality". But given enormous global liquidity and complacency about risks, during periods of only slightly rising fears or lack of clarity about markets, the ubiquitous response is for investors to decrease market bets and leverage across-the-board. Such selling pressure reaches the Precious Metals as well.
The question is whether it is a minor trend for now or the beginning of something larger and more persistant. It will likely only take trading days or weeks at most to know more surely. And then we'll position accordingly. Whether we can book gains or losses at that time will only be a secondary concern. However, it should be noted that these developments do nothing to change my long-term outlook that the precious metals are in Primary Uptrend Bull Markets. The same macro-economic trends in place that have rallied the Precious Metals for 6 to 7 years now are still in-place and will be--possibly even more so--even during some of what the broad markets may dish-up in the coming months. Overly expansionary Central Bank policies around the world these past years are the fundamental reason for the bull markets in the metals. Those same Central Banks the world-over have been tightening monetary policies firmly and consistently for some time now and that is what has finally caused the change of sentiment in the long term debt markets. But ultimately, to keep the massive credit bubble from deflating in a "financial accident" after all of the rate tightening, the Central Bankers will be required to once again inflate money supply. The same favourable dynamic for the precious metals exists. If one believes it doesn't, it frankly won't matter where we hide our investment dollars. Deflationary fall-out will wreak havoc across all sectors. Under such a low-likelihood (but very high risk) scenario, the two best places to 'hide' are likely in cash and precious metals. But cash would very likely be subject to eventual and sudden re-inflation through rapid debasement which would then favor Gold and Silver.
We are still where we want to be. And the market lessons of the coming week will likely be some of the most valuable to us in future cycles in the Precious Metals markets.
As Always, I must remind the reader that I am not an investment advisor or even a market professional. You should studiously perform your own research or consult other experts if you feel unable to make your own investing choices. There are numerous caveats and warnings one should be familiar with before investing in narrow market sectors like the Precious Metals and in very new investment vehicles like Physical Bullion "Backed" ETF's. I am simply using this forum as a place to objectively document my own work on my personal investing theories and strategies for my own portfolios. Everyone is responsible for themselves in the end.
Saturday, June 9, 2007
Performance Update & Anticipating Allocation Adjustment
Note: This post was prepared the evening of June 6th to be posted during the day of June 7th. The market move substantially to the downside that day so I was going to update the content and then post. Instead, given the last two days in the markets, I have elected to post this as-is and then another post immediately following revisiting the subject and to provide the transparency I'm looking for here. After reading this post, please be sure to read my second post on this date to insure you have the complete picture and assessment of where I think we are in this current market. This is an important time to be vigilant.
My two most recent posts, of May 10th and May 18th, should serve as setting some near-term background and context for this update. To further understand the theory and assumptions behind this Precious Metal Allocation System, some of the earlierst posts from April provide more detail.
As expected and predicted in the two posts in May, GLD and SLV have been performing relatively on-par with one another during most of this time and this has been a slightly longer and less volatile phase in the market. A period of correction essentially but mostly expressed over time rather than via severe price fluctuations as can sometimes typify the Precious Metals. Not all that distasteful if one has the patience to do nothing while waiting. After the sharpest declines in this corrective phase that occurred in the last week of April, at which time Silver predictably lost roughly twice as much ground as Gold, we've been positioned back in both Gold and Silver instruments and roughly 50%/50%
The relative performance of both metals was quite similar for another two weeks confirming the wisdom of having moved back into a 50% position in Gold. Then, as anticipated in the post of May 18th, a bottom was put-in and a modest rally phase began between May 18th and 24th. As is common for new rally phases in these metals, Silver took the lead. During roughly the last two weeks or a little more, SLV has outperformed GLD by about 3 to 1. Since May 24th GLD has gained a modest ~2.5% while SLV has returnd ~6.8%
The data underlying the Allocation System are beginning to signal the need for a possible shift. The days immediately in front of us should probably provide more clarity. We would likely take profits in Silver but it must be noted that Gold has been particularly weak and there is a small chance that we could actually shift from Gold to some extent. Other methods of technical analysis--that are not necessarily primary tools for this Allocation System but nevertheless are monitored--indicate that Gold may need to spend some time testing support down in the per-ounce price range near $630. That is approximately 5% below prices today. Decreasing our allocation to Silver is the more tradional and likely scenario however, at this stage in the market but, as mentioned in recent posts, the patterns of late and seasonal factors are also revealing this period to be somewhat a-typical.
Keep checking this blog for a possible signal in coming days or weeks at the very most.
My two most recent posts, of May 10th and May 18th, should serve as setting some near-term background and context for this update. To further understand the theory and assumptions behind this Precious Metal Allocation System, some of the earlierst posts from April provide more detail.
As expected and predicted in the two posts in May, GLD and SLV have been performing relatively on-par with one another during most of this time and this has been a slightly longer and less volatile phase in the market. A period of correction essentially but mostly expressed over time rather than via severe price fluctuations as can sometimes typify the Precious Metals. Not all that distasteful if one has the patience to do nothing while waiting. After the sharpest declines in this corrective phase that occurred in the last week of April, at which time Silver predictably lost roughly twice as much ground as Gold, we've been positioned back in both Gold and Silver instruments and roughly 50%/50%
The relative performance of both metals was quite similar for another two weeks confirming the wisdom of having moved back into a 50% position in Gold. Then, as anticipated in the post of May 18th, a bottom was put-in and a modest rally phase began between May 18th and 24th. As is common for new rally phases in these metals, Silver took the lead. During roughly the last two weeks or a little more, SLV has outperformed GLD by about 3 to 1. Since May 24th GLD has gained a modest ~2.5% while SLV has returnd ~6.8%
The data underlying the Allocation System are beginning to signal the need for a possible shift. The days immediately in front of us should probably provide more clarity. We would likely take profits in Silver but it must be noted that Gold has been particularly weak and there is a small chance that we could actually shift from Gold to some extent. Other methods of technical analysis--that are not necessarily primary tools for this Allocation System but nevertheless are monitored--indicate that Gold may need to spend some time testing support down in the per-ounce price range near $630. That is approximately 5% below prices today. Decreasing our allocation to Silver is the more tradional and likely scenario however, at this stage in the market but, as mentioned in recent posts, the patterns of late and seasonal factors are also revealing this period to be somewhat a-typical.
Keep checking this blog for a possible signal in coming days or weeks at the very most.
Monday, June 4, 2007
Precious Metals ETF Alloc. System Update
As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted May 18, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
Since May 2nd when the last portfolio changes were made here upon signals generated by this Allocation System, the precious metals have continued their slow correction. As predicted in the prior blog post though, the performance of both Au and Ag has been very similar. Over the past 11 trading days since May 2nd, SLV has declined 3% while GLD has declined 2.4% The Allocation System--intended to keep us 100% invested in the Precious Metals at all times--has had us properly deployed in both Silver and Gold instruments during this time that both have performed at parity.
The latest results from futher work using these data indicated that this correction in both Au & Ag should put in it's bottom in the next few days. It could even have been that today represented the bottom and the next rally could begin as early as tomorrow. It could also be a few more days but the declines should be exhausted and the trend begin up again by middle of next week. It is a bit tougher to call at this time because there is no comparable historical period of data given that SLV is only about a year old now. Other historical data sources tested as surrogates for SLV, the silver ETF, so far haven't behaved close enough to trading in the actual ETF's to work to my satisfaction. However, barring some exogenous major event in the markets in the coming days, data thus far does seem to indicate the correction process is about complete. Within one week we should know for sure.
Since May 2nd when the last portfolio changes were made here upon signals generated by this Allocation System, the precious metals have continued their slow correction. As predicted in the prior blog post though, the performance of both Au and Ag has been very similar. Over the past 11 trading days since May 2nd, SLV has declined 3% while GLD has declined 2.4% The Allocation System--intended to keep us 100% invested in the Precious Metals at all times--has had us properly deployed in both Silver and Gold instruments during this time that both have performed at parity.
The latest results from futher work using these data indicated that this correction in both Au & Ag should put in it's bottom in the next few days. It could even have been that today represented the bottom and the next rally could begin as early as tomorrow. It could also be a few more days but the declines should be exhausted and the trend begin up again by middle of next week. It is a bit tougher to call at this time because there is no comparable historical period of data given that SLV is only about a year old now. Other historical data sources tested as surrogates for SLV, the silver ETF, so far haven't behaved close enough to trading in the actual ETF's to work to my satisfaction. However, barring some exogenous major event in the markets in the coming days, data thus far does seem to indicate the correction process is about complete. Within one week we should know for sure.
Cycle and Allocation Update
As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted May 10, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
My blog posts of April 24th & 25th should help to make this update more complete and understandable to a reader new to this system I am testing and refining. Reading the earliest posts would further explain this project. As indicated by the dates of new picks I made on May 02 and 03, this system essentially indicated that the correction was ending at that time whereby Silver would be significantly underperforming Gold. Accordingly, I began making new selections and re-selecting instruments in which I had taken profits upon recent sell signals. SLV is now picked again for instance.
As I discussed in earlier posts, I would be making adjustments in the list of instruments I would use here given the scoring methods of CAPS. If one reads my pitch on an "ended" pick for GDX they will see such an example and attempt. They will also then note that I placed a Outperform pick on the same GDX last week as I got signals the correction was coming to an end. Whether this allocation system which is admitedly most focused upon "trading" the physical bullion ETF's will work well with the stocks of metals miners is yet to be seen. In the near-term results have been mixed at best. CAPS seem a great place to test and discover just such answers though.
I introduced other miners' stocks as picks this cycle further attempting to increase the chances of booking positive scores in CAPS. Only time will tell if that will be successful.
As I mentioned in earlier posts, as long as the S&P continued in a strong short-to-intermediate-term uptrend, this system would lag and therefore record poor CAPS scores and ratings. I'm more than willing to apply the patience that will be required to test over a much longer period of time though. As anyone watching the markets these past couple months knows, the uptrend in US Stock Markets (since a very small "correction" in late February) has been historic. AND, I might add, unsustainable. Records are being broken and set almost daily. See the article copied at the bottom of this post for documentation of the market context of late. Frankly this has all the appearances of a blow-off top to me in equities but that is not my focus here. Meanwhile, in the short run, even picks this Allocation System has indicated that have delivered positive returns can--and have--lagged the indices. Time will correct that I am confident. Meanwhile, this work languishes almost entirely unnoticed here @ CAPS since a player with such a low score and rating likely doesn't get the attention of others visiting these pages. Below are some updates on allocations and dates and historic performance outside of the CAPS scoring system:
- As of May 03, 2007, we're back in both Silver and Gold instruments. Although the precious metals continue to correct downward in price, they are both correcting at about the same magnitude and, in most recent days, Silver has even been showing slightly smaller declines on a percentage basis relative to Gold.
- Since April 10th we were mostly allocated to Gold having taken early profits in Silver. During this period of the cycle that lasted from April 11 through April 23, GLD returned 1.64% (over only 9 trading days) while SLV returned a lower 0.59% during the same time. The system had us focused where we should have been then.
- By April 24th it was obvious that any further profits should be taken in Silver vehicles in the context of CAPS scoring. The system had us almost 100% in GLD and Gold vehicles for this last portion of the cycle and that usually corresponds with corrections in BOTH of the precious metals and this period is usually quite short. In this case, 7 trading days ending on May 02. During that time when we took refuge almost entirely in Gold, SLV lost 5.46% while GLD only lost 2.34% Again, exactly what this system is intended to accomplish.
- Since moving back to a more balanced allocation of approximately 50% / 50% Gold and Silver on May 03, both GLD and SLV have performed very similarly and each returned about 1.2% over the past 5 trading days.
- Current trends in the Gold / Silver Ratio and a look at past performance data seem to indicate that we may be entering a period in which GLD & SLV perform quite similarly to one another. So it may be that we don't see any changes in allocations indicated in the near term. But the data should tell us going forward. Meanwhile, I toy with using different investment vehicles attempting to simulate market returns expressed in CAPS terms more in keeping with the actual performance of the ETF's. It could very well be that the Stock Markets finally see a larger correction and, in that context, this system may begin to show better relative performance BUT, the correlation of mining stocks to equities in general might negate that outperformance and therefore require that I remove some of those picks. We'll see.
Oh, it should be noted, in past cycles during this precious metals bull market where Gold and Silver have performed more at parity with one another for an extended period, it has lasted months and been characterized by fairly flat and sedate performance of the precious metals. Maybe what could be refered to as a "sideways consolidation" phase of the cycle. However, after such periods twice in recent years the next phase in the market has been a very strong uptrend in both metals with Silver outperforming and the metals markets blowing-off to new long-term highs. Before, of course, the resulting major corrections one would expect. So, we may be in for some relatively boring times but, if history repeats at all, could be rewarded with a big performance after some quiet months in these markets.
My blog posts of April 24th & 25th should help to make this update more complete and understandable to a reader new to this system I am testing and refining. Reading the earliest posts would further explain this project. As indicated by the dates of new picks I made on May 02 and 03, this system essentially indicated that the correction was ending at that time whereby Silver would be significantly underperforming Gold. Accordingly, I began making new selections and re-selecting instruments in which I had taken profits upon recent sell signals. SLV is now picked again for instance.
As I discussed in earlier posts, I would be making adjustments in the list of instruments I would use here given the scoring methods of CAPS. If one reads my pitch on an "ended" pick for GDX they will see such an example and attempt. They will also then note that I placed a Outperform pick on the same GDX last week as I got signals the correction was coming to an end. Whether this allocation system which is admitedly most focused upon "trading" the physical bullion ETF's will work well with the stocks of metals miners is yet to be seen. In the near-term results have been mixed at best. CAPS seem a great place to test and discover just such answers though.
I introduced other miners' stocks as picks this cycle further attempting to increase the chances of booking positive scores in CAPS. Only time will tell if that will be successful.
As I mentioned in earlier posts, as long as the S&P continued in a strong short-to-intermediate-term uptrend, this system would lag and therefore record poor CAPS scores and ratings. I'm more than willing to apply the patience that will be required to test over a much longer period of time though. As anyone watching the markets these past couple months knows, the uptrend in US Stock Markets (since a very small "correction" in late February) has been historic. AND, I might add, unsustainable. Records are being broken and set almost daily. See the article copied at the bottom of this post for documentation of the market context of late. Frankly this has all the appearances of a blow-off top to me in equities but that is not my focus here. Meanwhile, in the short run, even picks this Allocation System has indicated that have delivered positive returns can--and have--lagged the indices. Time will correct that I am confident. Meanwhile, this work languishes almost entirely unnoticed here @ CAPS since a player with such a low score and rating likely doesn't get the attention of others visiting these pages. Below are some updates on allocations and dates and historic performance outside of the CAPS scoring system:
- As of May 03, 2007, we're back in both Silver and Gold instruments. Although the precious metals continue to correct downward in price, they are both correcting at about the same magnitude and, in most recent days, Silver has even been showing slightly smaller declines on a percentage basis relative to Gold.
- Since April 10th we were mostly allocated to Gold having taken early profits in Silver. During this period of the cycle that lasted from April 11 through April 23, GLD returned 1.64% (over only 9 trading days) while SLV returned a lower 0.59% during the same time. The system had us focused where we should have been then.
- By April 24th it was obvious that any further profits should be taken in Silver vehicles in the context of CAPS scoring. The system had us almost 100% in GLD and Gold vehicles for this last portion of the cycle and that usually corresponds with corrections in BOTH of the precious metals and this period is usually quite short. In this case, 7 trading days ending on May 02. During that time when we took refuge almost entirely in Gold, SLV lost 5.46% while GLD only lost 2.34% Again, exactly what this system is intended to accomplish.
- Since moving back to a more balanced allocation of approximately 50% / 50% Gold and Silver on May 03, both GLD and SLV have performed very similarly and each returned about 1.2% over the past 5 trading days.
- Current trends in the Gold / Silver Ratio and a look at past performance data seem to indicate that we may be entering a period in which GLD & SLV perform quite similarly to one another. So it may be that we don't see any changes in allocations indicated in the near term. But the data should tell us going forward. Meanwhile, I toy with using different investment vehicles attempting to simulate market returns expressed in CAPS terms more in keeping with the actual performance of the ETF's. It could very well be that the Stock Markets finally see a larger correction and, in that context, this system may begin to show better relative performance BUT, the correlation of mining stocks to equities in general might negate that outperformance and therefore require that I remove some of those picks. We'll see.
Oh, it should be noted, in past cycles during this precious metals bull market where Gold and Silver have performed more at parity with one another for an extended period, it has lasted months and been characterized by fairly flat and sedate performance of the precious metals. Maybe what could be refered to as a "sideways consolidation" phase of the cycle. However, after such periods twice in recent years the next phase in the market has been a very strong uptrend in both metals with Silver outperforming and the metals markets blowing-off to new long-term highs. Before, of course, the resulting major corrections one would expect. So, we may be in for some relatively boring times but, if history repeats at all, could be rewarded with a big performance after some quiet months in these markets.
Lessons from 3 days of SLV v GLD
As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted April 24, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
Last Tuesday, April 17, I posted an early-warning on my blog about what appears to be an upcoming sell signal from my Allocation System. I expected the signal "by or during the first week of May. Within just 10 to 14 trading days from now." That was 5 trading days ago.
For those that haven't read any of my earlier blog posts, this Allocation System I am testing is driven mostly by trends in the Gold/Silver Ratio and also is intended to keep the investor's funds allocated to the tradeable Precious Metals vehicles--like the ETF's GLD (or IAU) and SLV--100% of the time. It is assumed the investor wants this portion of their assets exposed at all times to either Gold or Silver or a combination of both. But they would also obviously like, if possible, to maximize return while minimizing risks within that context of staying fully invested. Therefore, the Allocation System aims to have them more exposed to Silver when the odds favour Silver's outperformance and more to Gold when gold should perform better relative to Silver. Often, when Gold's better relative performance is most notable--and exploitable--is during downturns and market corrections in the metals. In other words, Gold almost always declines less than Silver during corrections in an otherwise bull market for the metals.
Thursday, after my early warning post of two days before, there was a notable one-day correction in both precious metals and in the mining stocks thereof. I've also refered in earlier posts that this System may ultimately be helpful to investors holding precious metals mining stocks to find opportune times to take profits and then re-deploy cash later. Indeed, I think we can generally observe that many of the mining stocks in this sector have generally been modestly correcting already since that early warning one week ago now.
The correction last Thursday was sizeable enough that I wondered if my signal was actually coming too late and that the "early warning" should have actually served as the true-blue Signal. So I went and looked at the historical data. That is what this exercise is all about. Testing and refining. And objectively reporting that process for all to see here.
As mentioned, the Gold/Silver Ratio and relative performance of the two metals is what this system is all about. When a periodic market correction occurs in the metals, Silver almost always declines more than Gold. I knew that during the most recent periodic cycles (dated in earlier blog posts), when the correction got into full swing, that Silver sold-off sharply and very quickly. To avoid this very steep decline in Silver by taking relative safe-haven in Gold is the most important goal we must accomplish with this system to outperform a buy-'n-hold strategy using either or both of the ETF's. Last Thursday, SLV's decline was 1.863 times that of GLD's. That seemed very normal and I also suspected it was not the kind of behaviour we've seen in recent corrections. Sure enough, during the prior two intermediate corrections in this market, the one day sell-off in both GLD and SLV that serves as the demarcation point for us, SLV's decline was 4.169 times that of GLD's during one cycle and 5.135 times during the next cycle. At least these hisotrical markers indicate that when the larger expected periodic sell-offs come, we would expect one of the major characteristics to be a much larger relative decline in SLV than what we saw last Thursday.
It appeared from my research that we should not probably have expected a follow-through and increased selling of SLV and GLD last Friday. At least if my System is generating signals accurately. And sure enough, both ETF's corrected back from Thursday's decline and made-up some of their losses from Thursday in Friday's trading. GLD rose 1.7% and SLV 2.3%, true to its character and historical performance. When I look back at recent similar-appearing stages in the cycle, this volatility is not uncommon. In fact it appears to be more the norm. Preliminarily, after looking at more data this weekend, I knew that what we should really suspect is that sometime before the 2nd and major Sell Signal is generated moving us completely out of Silver, that we should expect SLV to outperform GLD. Trading Monday April 23, came-in right on que it seemed. Monday, while GLD actually declined on the day, SLV posted a gain.
Now, I must admit that possibly the biggest challenge for me refining this system is the timing of the calls and the "last" or "2nd" call in particular. Frankly, I'm nervous as heck right now that the "real" correction could begin any day now. I will be quite surprised if we get through next week, the first week of May, without the correction getting into full-swing. So partially, I want to preserve gains and error on the side of being "early". But I'm not sure that is really what the System is saying to me so I'm resisting the urge, for now. Of course, this is "all off" if some exogenous event comes along on the major economic or political stage that disrupts what we might otherwise expect to be "normal market conditions" in the metals right now. By definition, I don't expect any such disruption though. Precisely because it would be un-predictable event.
Every sign is though, to me at least, that we are in the waning days of this short-term uptrend that began on or about March 1st this year after the last minor correction in the metals. For instance, Silver was much higher in Monday's session and came back down to close with a much more modest gain that it showed earlier in the trading session. Watching the action of the metals mining stocks these past days also seems to indicate some "toppy" signs. For instance, two Silver Stocks favoured by many investors in this sector showed weakness today (SSRI, PAAS). The ETF GDX, which attempts to match the AMEX Precious Metals Miners Index, declined almost 1%
With SLV giving back much of its gain Monday and GLD showing an actual decline, this market is looking overdue for a correction.
In subsequent posts I need to report on several items:
1. Adjustments that I now see I need to make to better match this System to the scoring rules used in Motley Fool's CAPS;
2. Documenting a couple of trades I've most recently made in light of #1 above;
3. Observations I'm making that the relative out-performance of Silver has been weakening each of these past cycles in this market since late last Summer (2006). That in fact, during this current cycle, the Gold/Silver Ratio has tested it's 200 DMA several times and appears, upon any decent correction, to be positioned to pierce the 200 DMA and that too, may indicate a coming period where Gold and Silver perform more similar to one another and, in fact, Gold could even outperform Silver for awhile.
4. The beginning of my research into the operational stability and merit of the Precious Metals ETF's and pros and cons of these market instruments compared to the investor actually taking physical possession of bullion. And finally, news on more physical bullion-backed ETF's coming to market and this time, the long rumoured ETF's for Platinum and Palladium. I will also attempt to include my thoughts on whether the continued creation of such ETF's could be a contrary indicator about this market.
Last Tuesday, April 17, I posted an early-warning on my blog about what appears to be an upcoming sell signal from my Allocation System. I expected the signal "by or during the first week of May. Within just 10 to 14 trading days from now." That was 5 trading days ago.
For those that haven't read any of my earlier blog posts, this Allocation System I am testing is driven mostly by trends in the Gold/Silver Ratio and also is intended to keep the investor's funds allocated to the tradeable Precious Metals vehicles--like the ETF's GLD (or IAU) and SLV--100% of the time. It is assumed the investor wants this portion of their assets exposed at all times to either Gold or Silver or a combination of both. But they would also obviously like, if possible, to maximize return while minimizing risks within that context of staying fully invested. Therefore, the Allocation System aims to have them more exposed to Silver when the odds favour Silver's outperformance and more to Gold when gold should perform better relative to Silver. Often, when Gold's better relative performance is most notable--and exploitable--is during downturns and market corrections in the metals. In other words, Gold almost always declines less than Silver during corrections in an otherwise bull market for the metals.
Thursday, after my early warning post of two days before, there was a notable one-day correction in both precious metals and in the mining stocks thereof. I've also refered in earlier posts that this System may ultimately be helpful to investors holding precious metals mining stocks to find opportune times to take profits and then re-deploy cash later. Indeed, I think we can generally observe that many of the mining stocks in this sector have generally been modestly correcting already since that early warning one week ago now.
The correction last Thursday was sizeable enough that I wondered if my signal was actually coming too late and that the "early warning" should have actually served as the true-blue Signal. So I went and looked at the historical data. That is what this exercise is all about. Testing and refining. And objectively reporting that process for all to see here.
As mentioned, the Gold/Silver Ratio and relative performance of the two metals is what this system is all about. When a periodic market correction occurs in the metals, Silver almost always declines more than Gold. I knew that during the most recent periodic cycles (dated in earlier blog posts), when the correction got into full swing, that Silver sold-off sharply and very quickly. To avoid this very steep decline in Silver by taking relative safe-haven in Gold is the most important goal we must accomplish with this system to outperform a buy-'n-hold strategy using either or both of the ETF's. Last Thursday, SLV's decline was 1.863 times that of GLD's. That seemed very normal and I also suspected it was not the kind of behaviour we've seen in recent corrections. Sure enough, during the prior two intermediate corrections in this market, the one day sell-off in both GLD and SLV that serves as the demarcation point for us, SLV's decline was 4.169 times that of GLD's during one cycle and 5.135 times during the next cycle. At least these hisotrical markers indicate that when the larger expected periodic sell-offs come, we would expect one of the major characteristics to be a much larger relative decline in SLV than what we saw last Thursday.
It appeared from my research that we should not probably have expected a follow-through and increased selling of SLV and GLD last Friday. At least if my System is generating signals accurately. And sure enough, both ETF's corrected back from Thursday's decline and made-up some of their losses from Thursday in Friday's trading. GLD rose 1.7% and SLV 2.3%, true to its character and historical performance. When I look back at recent similar-appearing stages in the cycle, this volatility is not uncommon. In fact it appears to be more the norm. Preliminarily, after looking at more data this weekend, I knew that what we should really suspect is that sometime before the 2nd and major Sell Signal is generated moving us completely out of Silver, that we should expect SLV to outperform GLD. Trading Monday April 23, came-in right on que it seemed. Monday, while GLD actually declined on the day, SLV posted a gain.
Now, I must admit that possibly the biggest challenge for me refining this system is the timing of the calls and the "last" or "2nd" call in particular. Frankly, I'm nervous as heck right now that the "real" correction could begin any day now. I will be quite surprised if we get through next week, the first week of May, without the correction getting into full-swing. So partially, I want to preserve gains and error on the side of being "early". But I'm not sure that is really what the System is saying to me so I'm resisting the urge, for now. Of course, this is "all off" if some exogenous event comes along on the major economic or political stage that disrupts what we might otherwise expect to be "normal market conditions" in the metals right now. By definition, I don't expect any such disruption though. Precisely because it would be un-predictable event.
Every sign is though, to me at least, that we are in the waning days of this short-term uptrend that began on or about March 1st this year after the last minor correction in the metals. For instance, Silver was much higher in Monday's session and came back down to close with a much more modest gain that it showed earlier in the trading session. Watching the action of the metals mining stocks these past days also seems to indicate some "toppy" signs. For instance, two Silver Stocks favoured by many investors in this sector showed weakness today (SSRI, PAAS). The ETF GDX, which attempts to match the AMEX Precious Metals Miners Index, declined almost 1%
With SLV giving back much of its gain Monday and GLD showing an actual decline, this market is looking overdue for a correction.
In subsequent posts I need to report on several items:
1. Adjustments that I now see I need to make to better match this System to the scoring rules used in Motley Fool's CAPS;
2. Documenting a couple of trades I've most recently made in light of #1 above;
3. Observations I'm making that the relative out-performance of Silver has been weakening each of these past cycles in this market since late last Summer (2006). That in fact, during this current cycle, the Gold/Silver Ratio has tested it's 200 DMA several times and appears, upon any decent correction, to be positioned to pierce the 200 DMA and that too, may indicate a coming period where Gold and Silver perform more similar to one another and, in fact, Gold could even outperform Silver for awhile.
4. The beginning of my research into the operational stability and merit of the Precious Metals ETF's and pros and cons of these market instruments compared to the investor actually taking physical possession of bullion. And finally, news on more physical bullion-backed ETF's coming to market and this time, the long rumoured ETF's for Platinum and Palladium. I will also attempt to include my thoughts on whether the continued creation of such ETF's could be a contrary indicator about this market.
Heads-Up on Gold and Silver Stocks
As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted April 17, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
Although it is too early to know for sure and attempting to make predictions such as this is usually hubris, if current trends in the Precious Metals markets continue to closely mimic their behaviour during the most recent cycle in this allocation system, one would expect to get a signal to sell Silver entirely by or during the first week of May. Within just 10 to 14 trading days from now. Odds overwhelmingly favor this forecast being wrong just given the likelihood that a mere mortal can divine market actions that the "best and brightest" on Wall Street can't get correct a majority of the time. However, given some similarities noticed so far, I thought it would be fun to document this early, attempting to be as transparent as possible about my learning process here.
Also, if the next signal is anything like the previous 3, the signal will only come within just a few days at most before a substantial correction in the metals and in particular, the stocks of metals miners. Therefore, I thought giving a little early-warning signal now might be helpful in the context of CAPS and the time it might take for any players following the Precious Metals stocks to find the warning here. If they have even found me yet here @ CAPS (doubtful).
The Allocation System, if it indeed does generate this signal, will move the hypothetical investor 100% to Gold from currently holding both Gold and Silver. Both Silver and Gold would be expected to correct but Gold should decline less severly than Silver if history holds-true once again (this, I feel quite confident of). As mentioned in earlier posts, this system is intended to keep the Precious Metals portion of the investor's portfolio 100% in either Silver or Gold or both but more aggressive investors may also want to follow this system to see if it accurately helps them identify when to take profits in the ETF's or mining shares and move somewhat--or entirely--to cash for a brief period of time. At least to take profits on some of their positions maybe or reduce leverage or risks?
I would expect the shares in Mining Companies most often followed and traded by investors bullish on the Precious Metals to correct notably upon the next sell signal. They are usually more volatile than the bullion ETF's, GLD (or IAU) and SLV. Although the depth of the decline this time might be less severe, interested investors can go look at the price action in this sector during each of the last three corrections to get an idea of what we might expect. Each of these 3 corrections have been short but sharp, lasting roughly 10 to 14 days at most and having begun on the following approximate dates:
August 31, 2006
December 4, 2006
February 21, 2007
We'll "talk" in a few weeks and pick-apart this early prediction then.
Although it is too early to know for sure and attempting to make predictions such as this is usually hubris, if current trends in the Precious Metals markets continue to closely mimic their behaviour during the most recent cycle in this allocation system, one would expect to get a signal to sell Silver entirely by or during the first week of May. Within just 10 to 14 trading days from now. Odds overwhelmingly favor this forecast being wrong just given the likelihood that a mere mortal can divine market actions that the "best and brightest" on Wall Street can't get correct a majority of the time. However, given some similarities noticed so far, I thought it would be fun to document this early, attempting to be as transparent as possible about my learning process here.
Also, if the next signal is anything like the previous 3, the signal will only come within just a few days at most before a substantial correction in the metals and in particular, the stocks of metals miners. Therefore, I thought giving a little early-warning signal now might be helpful in the context of CAPS and the time it might take for any players following the Precious Metals stocks to find the warning here. If they have even found me yet here @ CAPS (doubtful).
The Allocation System, if it indeed does generate this signal, will move the hypothetical investor 100% to Gold from currently holding both Gold and Silver. Both Silver and Gold would be expected to correct but Gold should decline less severly than Silver if history holds-true once again (this, I feel quite confident of). As mentioned in earlier posts, this system is intended to keep the Precious Metals portion of the investor's portfolio 100% in either Silver or Gold or both but more aggressive investors may also want to follow this system to see if it accurately helps them identify when to take profits in the ETF's or mining shares and move somewhat--or entirely--to cash for a brief period of time. At least to take profits on some of their positions maybe or reduce leverage or risks?
I would expect the shares in Mining Companies most often followed and traded by investors bullish on the Precious Metals to correct notably upon the next sell signal. They are usually more volatile than the bullion ETF's, GLD (or IAU) and SLV. Although the depth of the decline this time might be less severe, interested investors can go look at the price action in this sector during each of the last three corrections to get an idea of what we might expect. Each of these 3 corrections have been short but sharp, lasting roughly 10 to 14 days at most and having begun on the following approximate dates:
August 31, 2006
December 4, 2006
February 21, 2007
We'll "talk" in a few weeks and pick-apart this early prediction then.
Near Term Back-Testing Results: GLD & SLV Allocation System
As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted April 15, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
Since August 28, 2006 through last Tuesday, April 10 (2007) the Silver ETF (SLV) returned 13.97% The Gold ETF (GLD) returned 11.32% if held during the same time period. The S&P500 Index returned 11.39% during the same period of time, exluding dividends. The similarities of returns alone, between the Precious Metals and the S&P over that period is an interesting fact.
The back-testing of this Allocation System over that ~7 month period indicates one would have generated a total return of 28.22% following the signals of when to concentrate upon SLV or GLD or a combination of the two. The hypothetical investor would have still been 100% invested in either one--or a combination of both--of the Precious Metals ETF's during the entire time. This proposed system is not one of trading from the investment vehicles into cash and back again. One of the basic assumptions underlying this system is that the investor is wishing to maintain 100% exposure to Precious Metals with this portion of their overall investment portfolio. It could be, for instance, that the investor has a small 5% to 10% of their overall investments allocated to the metals as a hedge against inflation or other concerns about economic conditions going-forward. The goal of this system is to allow the investor to maintain that allocation to the metals while maximizing return within that sector and attempting to minimize downsize risks.
As mentioned in earlier posts, the Silver market has a solid, long-term history of being more volatile than Gold. Silver generally experiences greater gains during uptrends and larger losses during downtrends, relative to Gold that is. During this 7 month period in fact, the Silver ETF had one 10-day period with a 17% decline. The Gold ETF lost a lesser 9.5% during that steep correction in the metals markets. But this Allocation System being tested here would have theoretically limited the investor to a loss of even less than the 9.5% experienced in the GLD ETF alone.
During this ~7 month backtested period, the Allocation System would have signaled 8 changes in allocations. That is, 8 trades would have been made in the market between SLV and GLD to one extent or another. Sometimes the investor would have been 100% in SLV or 100% in GLD and during other periods, a combination of the two. During the 153 trading days of this period tested, 43% of the time the investor was allocated entirely to SLV; 29% entirely to GLD and the remaining 28% of the period, to GLD and SLV each in equal proportions.
Designing such a system in hindsight is, of course, monumentally easier than making the correct investment decisions ahead of time. That is the point of documenting this exercise via CAPS here @ Fool. Time will indicate whether these results can be more or less replicated going-forward. I'm looking forward to the chance to test here and make any refinements.
Since August 28, 2006 through last Tuesday, April 10 (2007) the Silver ETF (SLV) returned 13.97% The Gold ETF (GLD) returned 11.32% if held during the same time period. The S&P500 Index returned 11.39% during the same period of time, exluding dividends. The similarities of returns alone, between the Precious Metals and the S&P over that period is an interesting fact.
The back-testing of this Allocation System over that ~7 month period indicates one would have generated a total return of 28.22% following the signals of when to concentrate upon SLV or GLD or a combination of the two. The hypothetical investor would have still been 100% invested in either one--or a combination of both--of the Precious Metals ETF's during the entire time. This proposed system is not one of trading from the investment vehicles into cash and back again. One of the basic assumptions underlying this system is that the investor is wishing to maintain 100% exposure to Precious Metals with this portion of their overall investment portfolio. It could be, for instance, that the investor has a small 5% to 10% of their overall investments allocated to the metals as a hedge against inflation or other concerns about economic conditions going-forward. The goal of this system is to allow the investor to maintain that allocation to the metals while maximizing return within that sector and attempting to minimize downsize risks.
As mentioned in earlier posts, the Silver market has a solid, long-term history of being more volatile than Gold. Silver generally experiences greater gains during uptrends and larger losses during downtrends, relative to Gold that is. During this 7 month period in fact, the Silver ETF had one 10-day period with a 17% decline. The Gold ETF lost a lesser 9.5% during that steep correction in the metals markets. But this Allocation System being tested here would have theoretically limited the investor to a loss of even less than the 9.5% experienced in the GLD ETF alone.
During this ~7 month backtested period, the Allocation System would have signaled 8 changes in allocations. That is, 8 trades would have been made in the market between SLV and GLD to one extent or another. Sometimes the investor would have been 100% in SLV or 100% in GLD and during other periods, a combination of the two. During the 153 trading days of this period tested, 43% of the time the investor was allocated entirely to SLV; 29% entirely to GLD and the remaining 28% of the period, to GLD and SLV each in equal proportions.
Designing such a system in hindsight is, of course, monumentally easier than making the correct investment decisions ahead of time. That is the point of documenting this exercise via CAPS here @ Fool. Time will indicate whether these results can be more or less replicated going-forward. I'm looking forward to the chance to test here and make any refinements.
SLV (ETF) Sell Signal for Conservative Investors - April 11, ' 07
As mentioned in prior posts, I began blogging on this developing Gold and Silver ETF Allocation System via the "CAPS System" on Motley Fool's site, fool.com. Due to the scoring-system used at CAPS though, I am making this blog the primary location online where I will document my progress refining this System and its performance in the market. This entry below was originally posted April 11, 2007 @ CAPS. I've copied it here to provide a complete history to the reader who wishes to research my Allocation System development over time and confirm the transparcency of my process. One can obviously view the original entry from that point in time via my CAPS blog there but I encourage one to primarily follow my Allocation System via this blog, Greham's Day in the Sun.
I will document the theory and rules behind this Silver & Gold Allocation System in a later, separate blog post. For now though, today the system I am testing signaled a shift to be made in the allocations for more conservative investors. 50% of holdings in the Silver ETF (SLV)--or proxies for it--should be sold today, April 11. Since the last signaled change in allocation March 2nd (before I began at CAPS), SLV has returned 7.53% and GLD 5.42%, over 40 calendar days. Annualized, those returns would be over 67% and 48% respectively. This can be viewed from several perspectives but using simple probabilities, one would find it prudent to take profits. At least for conservative investors using this system.
In the real-money markets, this system could be followed simply using two tickers, SLV and GLD (or IAU), the Silver and Gold ETF's respectively (there are others in the market now that will be detailed in my future posts). If one were just using those two vehicles though and considered themselves a "conservative" investor (definitions to be discussed in subsequent blog posts as well), they should take profits by selling one-half of their position in SLV and putting those proceeds into GLD (this system maintains a 100% invested position in the two Precious Metals at almost all times). As stated in the pitches for each of the 11 vehicles being used here in CAPS though, in order to always meet the minimum of 7 picks, more tickers are being used. Several "pure play" mining stocks are being used here as well as an adaptation for CAPS rules. And since Precious Metals Mining stocks tend to be more volatile, that is, should have a higher "beta" relative to the bullion-backed ETF's, those will be sold first to take profits as might be prudent for a more conservative user of this system. Accordingly, SLW and SSRI were sold at the market open on April 11th, 2007.
I will document the theory and rules behind this Silver & Gold Allocation System in a later, separate blog post. For now though, today the system I am testing signaled a shift to be made in the allocations for more conservative investors. 50% of holdings in the Silver ETF (SLV)--or proxies for it--should be sold today, April 11. Since the last signaled change in allocation March 2nd (before I began at CAPS), SLV has returned 7.53% and GLD 5.42%, over 40 calendar days. Annualized, those returns would be over 67% and 48% respectively. This can be viewed from several perspectives but using simple probabilities, one would find it prudent to take profits. At least for conservative investors using this system.
In the real-money markets, this system could be followed simply using two tickers, SLV and GLD (or IAU), the Silver and Gold ETF's respectively (there are others in the market now that will be detailed in my future posts). If one were just using those two vehicles though and considered themselves a "conservative" investor (definitions to be discussed in subsequent blog posts as well), they should take profits by selling one-half of their position in SLV and putting those proceeds into GLD (this system maintains a 100% invested position in the two Precious Metals at almost all times). As stated in the pitches for each of the 11 vehicles being used here in CAPS though, in order to always meet the minimum of 7 picks, more tickers are being used. Several "pure play" mining stocks are being used here as well as an adaptation for CAPS rules. And since Precious Metals Mining stocks tend to be more volatile, that is, should have a higher "beta" relative to the bullion-backed ETF's, those will be sold first to take profits as might be prudent for a more conservative user of this system. Accordingly, SLW and SSRI were sold at the market open on April 11th, 2007.
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