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.