Archive for July, 2009
As of today, July 28th, HGD.TO has hit $7.02 around 9:35am. I’m still holding the etf from $6.18. I believe in just another few more days, it should rise to above $7.50.
I’ll be back soon with more updates. Don’t forget to check, http://www.Xovian.com for free Charts + Data.
Bought HGD.TO at $6.18 the other day. Gold itself is in a drop mode so I going to wait it out a bit.
I have a few stocks in mind for the next few months so keep checking my site for updates. And the good news…I am not like other traders who post their “HOT STOCKS” —> AFTER a stock goes up. People who follow these traders get screwed for entering the stock right before it starts to fall hard. Personally, if I see a stock/ETF that’s going to go up, I will actually give you a heads up before hand. That way all of you daytraders will be able to enter in at its lowest point and sell for a high profit.
I suggest that investors should consider using the 3 R’s: Reduce equities, Redeploy positions to favorable seasonal trades and readjust risk by selecting more conservative investments within sectors. This message will always be useful.
Well, actually utilities have not been ever really been for the widows and orphans as a conservative investment. A lot of investors have a misconception that this sector is too conservative and boring. This sector has its seasonally strong period that has produced above market returns from July 20th to October 3rd.
Generally, utilities are a bit of a hybrid sector – they are stocks but they also have an interest rate sensitivity component and hence have an element of a bond trade.
Utilities tend to do well in the late summer as investors look for a safe place to hide and they benefit from a positive bond trade that can take place at this time of year. A few months ago there was a picture of Bernanke blowing bond bubbles and suggested that investors should stay away from the long end of the bond curve because of the probability of rising rates. Long rates have since gone through the roof, as predicted. Despite this climb in rates, on a seasonal basis there can be reprieve during the summer. Please note that in the next edition of my guide, I plan on using a bond index rather than a percentage change in yields. The result will be a more accessible analysis of bond trends.
The reason that I point this trend out is that it provides a positive impetus for utilities to perform in the late summer.
The chart of the XLU ETF (Amex Select Spyder- Utilities) illustrates the success of the last three seasonal trades and illustrates three classic technical patterns.
On the technical side the utilities sector had a left shoulder (LS) and then a head (H) and then a right shoulder (RS), which then broke through the neckline in September of 2008. The reason that I point this pattern out is that after two successful seasonal trades in 2006 and 2007, investors should have noted the breakdown in 2008 and considered at least a partial reduction in the sector position when the neckline was penetrated. A head and shoulders pattern is considered to be bearish and is usually recognized by a lot of investors.
The next pattern in the graph is a failure of a bullish ascending triangle. Usually this pattern is exited with an upwards move. Not all patterns are a success. In this case the pattern failed and the sector moved lower. The most recent technical pattern is an ascending wedge, which is considered bearish. Look for this pattern to exit downside and possibly take the XLU to $25 at the start of the seasonal trade. This would be a good entry point for the sector.
My favorite seasonal trade is oil stocks from February 25th to May 9th. Although this sector underperformed the broad market because of the strong rally in March, the sector once again produced a positive rate of return. The sector has been positive 24 of the last 26 winter seasonal periods. In the XEG chart I have illustrated the success of this trade over the last three years with green and red arrows with circles around them – green for the buy date and red for the sell date. This seasonal trade is considered to be very strong because of its past success rate.
There is another seasonal trade for oil that lasts from July 24th to October 3rd. This trade has produced an average gain of 2.9% and has outperformed the S&P 500, 63% of the time. Neither the gain nor the frequency is as strong as the winter oil trade. In managing a portfolio with this trade, a lower equity amount should be used and more attention to technical action in the markets should be considered. For more details on the year by year performance of the oil sector.
Oil and oil stocks tend to do well at this time of year because refineries are preparing winter by switching over some of their capacity to produce heating oil. Because heating oil it is typically shipped in autumn, extra demand from the refineries tends to push up the oil prices in the late summer and early autumn.
If we take a look at the XEG performance over the last three years, it is evident that XEG has been range bound for two and a half years and then the sector melted down with the stock markets and the expectation of slower global growth. Towards the end of September the XEG had a death cross (50 Day MA crossing over the 200 Day MA). As this bearish condition occurred just before the end of the seasonal trade, it was an indication that the trade should be exited early.
The line at $18.25 had previously acted as good support when XEG was range bound. Now the ETF is below this line, the same line is providing resistance and hampering progress past this point. The sector has turned down from this point and looks to be heading lower. At the start of the seasonal trade look for XEG to be at $14 and possibly $13. A very bullish scenario, although unlikely, would be for a run up to $18. At this point investors should consider capturing some profits.
Gold usually does well from the end of July to the end of September. This seasonal trade is based upon the increase in demand for gold from the gold fabricators buying gold to make jewelry for the Indian wedding and festival season that occurs in the autumn (67% of gold produced is used for jewelry and India consumes the most gold).
The ideal seasonal trading dates have been from July 27th to September 25th. From 1984 to 2008 the XAU (PHLX Gold/Silver Sector) has produced an average return of 7.9% in its seasonally strong period. Even during its strong seasonal time period, gold’s returns can be very volatile. From 1984 to 2008 the seasonally strong period had twelve periods of greater than 10% performance (fi ve periods of greater than 20%), and three periods of a loss greater than 10%.
Despite all of the volatility in the gold market, in Canadian dollar terms the metal has been range bound. The XGD ETF has generally oscillated between $16.50 and $22.00. Recently XGD has pulled back with gold prices: this is the season for weakness in gold. Having an investment pull back before a seasonally strong period is usually favorable. It sets the trade up for positive bounce at the right time.
The XGD graph uses an upwards green arrow to show the seasonal buy date and a downwards red arrow to show the sell date. XGD has performed relatively well over the last three years including last year. In the autumn of 2008 gold stocks sold off substantially, as hedge fund managers liquidated their positions in gold to cover their margin.
Look for XGD to pull back to $15.50 or $16.50 over this month. Although this would be an excellent price point to enter the sector, a higher price does not exclude the trade from performing well. It is possible that the seasonal trade will take XGD to $22. If the ETF crosses this point early in its seasonal period on good volume the $22 should act as support and be considered for a partial stop-loss position.
In general, it is better to be defensive during the summer months, but even for the defensive sectors there is a good seasonal time to enter a trade. In the next few days, I am going to present three sector opportunities that are shaping up to be a good trade – gold, oil and utilities. Stay tuned.
In July investors will probably stumble across an article or two discussing the possibility of a summer rally. The articles usually portray the opinion that the market has room to run based upon some good numbers that have come out at the time. July is earnings month and the market can do well in the first half of the month based upon the expectations of good earnings.
The official date for the non-favorable season is May 5th. This is typically the time that the market starts to roll over and proceed into the summer doldrums.
Is a summer rally from July 20th possible? Absolutely, but the returns from July 20th to October 27th are well short of spectacular. In fact, the market has only been positive 51% of the time during this period and produced an average gain of -0.8%. Some investors may be inclined to just “wait it out.” Using the average numbers, it is 50/50 that the market will be up and then there is only a loss of less than 1%.
In my books these are not good odds. Investors are in the market to make money, otherwise why be there? During this time there is a higher chance of a large downdraft, compared with the rest of the year. Why take the risk?
Sometimes the best way to illustrate the validity of an approach is to make a comparison. If the subsequent period of October 28th to January 31st is used (a similar time frame), the return profile is much better, to say the least. During this time period the market has returned an average 5.3% and has been positive 78% of the time. This time period is clearly a better time to focus on equity investments.
Below is a yearly chart that illustrates the returns from July 20th to October 27th, by year, by decade. All the really large returns above 10% in the late summer took place either at the start or the middle of a strong bull market. We are obviously not in the middle of a strong bull market and I doubt we are starting one. Therefore, from a seasonal perspective it is prudent to favor the position of reducing equities.