If the pattern of past cycles is roughly repeated, I would expect this Allocation System to generate a signal to sell some or all holdings of Silver within just days. By the end of next week (August 6 - 10) would seem very likely.
It will be a tough call as to whether this should be a signal to sell one-half of positions in (or leveraged to) silver or to sell all such positions in Ag. As of this writing, I would expect to sell all holdings of Silver &/or mining stocks highly correlated to Ag (Silver).
Since the last signal generated (July 5th) through today, SLV has returned 3.48% and GLD 2.28% Silver showing stronger relative strength as expected. The S&P500 (SPX) has declined 3.48% during that same period of roughly one month.
Showing posts with label Allocation Change Signals. Show all posts
Showing posts with label Allocation Change Signals. Show all posts
Thursday, August 2, 2007
Tuesday, July 31, 2007
GLD (Au) & SLV (Ag) during a stock market correction
Last week (trading dates July 23 - 27, 2007) witnessed the second significant stock market correction this year. The precious metals experienced some declines like most asset classes and I thought a quick comparison might be in order.
Since my last blog post here (July 18 on Fool.com blog) through last Friday, July 27th, the Dow Jones Ind. Average lost approximately 5.05% GLD lost 0.52% and SLV lost 1.51% SLV once again showing it's higher "beta" relative to GLD--a basic observation and assumption behind this Allocation System here.
Compared with the broad (but shallow) market correction in February of this year, Au and Ag showed good relative strength to this most recent correction in equities which is noteworthy. Interestingly, this Allocation System also then signaled a second "buy" confirmation as of last Friday (27th) that we should be fully invested in the Precious Metals including Silver during this period of time. When the System generates that second buy confirmation signal (it often does), it is also an early indication that we will likely want to take some profits soon.
At this point during this latest cycle, we may not have much in the way of profits except in selected metals mining stocks but we also have outperformed the broad domestic and international stock market indices.
Expect a sell signal here soon.
For the most aggressive and short-term oriented traders, this second Ag buy signal as of last Friday, July 27, could be interpreted as a signal to make short-term speculative buys in the PM's and/or select PM mining stocks. As any market watcher knows however, now are some of the most precarious times in markets that we have witnessed in a long time. Speculator beware! Please heed any and all disclaimers and warnings I post on my site here.
Since my last blog post here (July 18 on Fool.com blog) through last Friday, July 27th, the Dow Jones Ind. Average lost approximately 5.05% GLD lost 0.52% and SLV lost 1.51% SLV once again showing it's higher "beta" relative to GLD--a basic observation and assumption behind this Allocation System here.
Compared with the broad (but shallow) market correction in February of this year, Au and Ag showed good relative strength to this most recent correction in equities which is noteworthy. Interestingly, this Allocation System also then signaled a second "buy" confirmation as of last Friday (27th) that we should be fully invested in the Precious Metals including Silver during this period of time. When the System generates that second buy confirmation signal (it often does), it is also an early indication that we will likely want to take some profits soon.
At this point during this latest cycle, we may not have much in the way of profits except in selected metals mining stocks but we also have outperformed the broad domestic and international stock market indices.
Expect a sell signal here soon.
For the most aggressive and short-term oriented traders, this second Ag buy signal as of last Friday, July 27, could be interpreted as a signal to make short-term speculative buys in the PM's and/or select PM mining stocks. As any market watcher knows however, now are some of the most precarious times in markets that we have witnessed in a long time. Speculator beware! Please heed any and all disclaimers and warnings I post on my site here.
Vacation Mode Update on Au & Ag
July 3rd this System signaled to be back in Silver (50%) for conservative investors who had only been in Gold until this time. For more aggressive investors that signal indicated to be 100% in Silver and/or to buy in selected Precious Metals Mining stocks. These changes were made in the market upon opening July 5th.
Earlier, June 1st was actually the last signal to sell all Silver holdings but the unrefined Allocation System did not confirm that timing. Further work identified that sell signal and will be tested here going forward.
Since the buy signal July 3rd, SLV has outperformed GLD approximately 2 to 1. Over the same 10 trading days, the AMEX "Gold Bugs Index" (HUI) has returned approximately 7% as has the PM Miners ETF, GDX.
A signal to take profits/protect gains and sell at least 50% of Silver holdings is expected within the next two or three weeks.
This post was first published via my Fool.com blog on July 18th and can be viewed via the link below to confirm its authenticity and accuracy in time (I was on the road during the month of July so maintaining multiple blogs was not in the cards. In such situations I use the Fool.com blog first since bolg posts there are not editable once posted so it easily creates an objective record of the timing of my entries and market calls):
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=11817&t=01009161890852769770
Earlier, June 1st was actually the last signal to sell all Silver holdings but the unrefined Allocation System did not confirm that timing. Further work identified that sell signal and will be tested here going forward.
Since the buy signal July 3rd, SLV has outperformed GLD approximately 2 to 1. Over the same 10 trading days, the AMEX "Gold Bugs Index" (HUI) has returned approximately 7% as has the PM Miners ETF, GDX.
A signal to take profits/protect gains and sell at least 50% of Silver holdings is expected within the next two or three weeks.
This post was first published via my Fool.com blog on July 18th and can be viewed via the link below to confirm its authenticity and accuracy in time (I was on the road during the month of July so maintaining multiple blogs was not in the cards. In such situations I use the Fool.com blog first since bolg posts there are not editable once posted so it easily creates an objective record of the timing of my entries and market calls):
http://caps.fool.com/Blogs/ViewPost.aspx?bpid=11817&t=01009161890852769770
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
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.
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