Gold & Silver – To Buy or Not to Buy?

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Here is a simple question for you: which would you rather buy right now,gold or silver?
Gold has incredible amounts of emotional baggage attached to it, while silver is in a different league – at least for the moment. This video from Adam Hewison will show you two indicators that can help you capture either market when and if the upward trend decides to resume.
With all of the world’s troubles, there are plenty of reasons why one would think that both of these markets should be much higher. The question is, why aren’t they? I think that the video you’re about to watch will help answer some of those questions.
In today’s short educational trading video, Hewison puts together comparisons between these two markets and why the obvious choice may not be the best choice.
As always their videos are free to watch and there are no registration requirements. 
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Has Gold & Silver Finally Bottomed?
Gold Price Gravitating Lower Towards $1000
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Top Holdings of Value-Oriented Hedge Funds

I have published the following article on Seeking Alpha, Top Holdings of Value-Oriented Hedge Funds.

To simplify the process, I used AlphaClone to generate a “Value Masters” clone of the 10 most popular holdings among 17 hedge funds and money managers. Please read the full article to see the backtest results for this clone and the current holdings.  While not all of the holdings in the Value Master clone are considered traditional “value” stocks, the most popular holdings from these 17 value managers has a strong history of out-performance.

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36 Momentum Stocks to Consider Now

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I update the following portfolio/screen on a monthly basis on Scott’s Investments. February’s list of 40 stocks is here and the top 10 rated stocks returned an average of  3.47% for the top 10 stocks on the list versus -1.14% for SPY. The entire list of 40 stocks last month returned an average of 2.50%, led  by First Cash Financial Services (FCFS) at 20.89%.

The screen looks for the following:

  • earnings growers still reasonably priced as judged by the PEG ratio 
  • low debt 
  • a history of high return on equity and investment, and 
  • price momentum as gauged by the percentage the stock is trading to its 250 day high. 
  • The stocks are then ranked based on fundamental factors as compiled by stockscreen123.

36 stocks qualified for this month’s list.  Just as in last month, this tells us individual stock momentum still exists in the market and the fundamental factors on the list are easy to find among the high momentum stocks.

This strategy of screening stocks has produced solid returns since this summer. For example, August’s list returned 16.17% versus 7.87% for SPY and July’s top 5 stocks returned over 19%.

The rational for this screen is based on backtests showing stocks with low PEG ratios, debt, and high returns on equity and price momentum have produced good historical returns. The screen has tested well historically in bullish periods and has suffered during significant market drawdowns. Strategies an investor could use to avoid major drawdowns would be to either abandon this type of strategy entirely when the SP 500 or another major index is below a long term moving average, or hedge positions using one of the methods I profiled here.



Two possible tools an investor could use to conduct this screen on his/her own are stockscreen123 or Finviz. This screen was conducted using stockscreen123. For the full list of stocks and real-time results, please see the right hand side of Scott’s Investments.


Ticker Name Trend Rank PEG LT DbtTot 2 EqQ
ASNA Ascena Retail Group Inc Here 99.8 0.98 0.02
AIT Applied Industrial Technologi Here 99.46 0.89 0
USPH U.S. Physical Therapy, Inc. Here 99.24 0.97 0.06
LRCX Lam Research Corporation Here 99.06 0.94 0.01
VSEA Varian Semiconductor Here 94.11 0.78 0
NSP Insperity Inc Here 91.92 0.68 0
DTV DIRECTV Here 91.38 0.59 0
SHOO Steven Madden, Ltd. Here 90.99 0.83 0
LECO Lincoln Electric Holdings, In Here 90.51 0.99 0.09
AAPL Apple Inc. Here 90.49 0.78 0
EZPW EZCORP, Inc. Here 89.25 0.74 0.04
FCFS First Cash Financial Services Here 88.94 0.79 0.01
CTCM CTC Media, Inc. Here 88.5 0.21 0
AVAV AeroVironment, Inc. Here 87.6 0.84 0
MA MasterCard Incorporated Here 87.58 0.75 0
NTES NetEase.com, Inc. (ADR) Here 86.61 0.66 0
ANF Abercrombie & Fitch Co. Here 84.6 0.73 0.04
DECK Deckers Outdoor Corporation Here 84.18 0.64 0
AIXG Aixtron AG (ADR) Here 83.06 0.26 0
FOSL Fossil, Inc. Here 83.04 0.84 0.01
PPDI Pharmaceutical Product Develo Here 82.01 0.89 0
SAM The Boston Beer Company, Inc. Here 80.22 0.92 0
IPGP IPG Photonics Corporation Here 80.04 0.96 0.08
NVEC NVE Corporation Here 79.16 0.8 0
BIDU Baidu.com, Inc. (ADR) Here 76.44 0.61 0
CRR CARBO Ceramics Inc. Here 75.52 0.98 0
GOOG Google Inc. Here 74.13 0.77 0.07
ALGN Align Technology, Inc. Here 73.09 0.81 0
SEIC SEI Investments Company Here 71.3 0.98 0.09
GSOL Global Sources Ltd. (Bermuda) Here 70.17 0.47 0
GA Giant Interactive Group Inc ( Here 66.77 0.94 0
BWLD Buffalo Wild Wings Here 63.12 0.85 0.07
SCSS Select Comfort Corp. Here 60.98 0.92 0
MASI Masimo Corporation Here 58.83 0.98 0
NSR Neustar, Inc Here 56.34 1 0.02
ESV ENSCO PLC Here 47.22 0.79 0.04



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Using Leveraged ETFs to Hedge Equity Portfolios

I recently wrote an article on 4 Methods to Hedge an Equity Portfolio.  A reader asked how leveraged ETFs would perform as a hedge in lieu of single (1x) short ETFs.  I should preface that I typically do not use leveraged ETFs and they carry additional risks including added volatility and the potential for tracking error. Please do not use leveraged ETFs unless you fully understand the product and the risks involved.


Two of the four methods from my first article can be tested using leveraged ETFs.

Relative Strength


 Assume we hold a portfolio of 5 ETFs – BND (bonds), DBC (commodities), VEU (international equities), VNQ (REITs), VTI (US equities), which represent 5 major asset classes.  A buy and hold portfolio since 2008 had 22.4% volatility and a -46.28% drawdown  (despite being allocated across 5 seemingly diverse asset classes) and, frankly, disappointing results (results from ETF Replay include dividends, the chart below has been updated to include this week’s returns so may differ slightly from the first article):

Next, I created a leveraged portfolio of SSO (Proshares 2x leveraged long S&P 500), SDS (Proshares 2x leveraged short S&P 500), and SHY (short-term treasuries, used as a close proxy for cash).  I went long whichever of the three had the highest combined ranking as determined by the highest relative strength over the past 3 months and 20 days, and lowest volatility over the past 20 days.  The system rebalanced semi-monthly, produced the following results. Volatility was  extremely high, which is to be expected when only holding  leveraged positions:



As in the first article, we can test returns if  an investor held 50% of a portfolio in the 5 ETF portfolio referenced above and allocated the other 50% to the leveraged strategy.  I used a 50% allocation to both strategies for simplicity and not as a recommended allocation. The strategy returns and volatility are below, slightly better than the returns of the 1x short leveraged strategy but at much higher volatility:

Market Conditions

Another hedging strategy is to based long/short positions on overall market conditions.  There are a myriad number of ways to gauge “market conditions” and how one hedges these “conditions” depends on your time-frame and current portfolio.  However, assume we hold a portfolio of US equities or US equity ETFs and wish to hedge them during “unfavorable” market conditions. 


Stockscreen123 has devised a timing system using 2 factors to determine “market conditions”:

 It assumes conditions are favorable for equity investing if EPS estimates are rising and if valuations are reasonable.

  1. The estimates test is whether the 5-week moving average of the aggregate of the consensus current-year estimates for S&P 500 companies is above the 21-week moving average.
  1. The valuation test is based upon risk premium, specifically, whether the S&P 500 risk premium (earnings yield minus 10-year treasury yield) is above 1%

For the leveraged system, when conditions are “favorable”, one would be long equities via SSO  and during unfavorable conditions, short equities via SDS.  Re-balancing every 4 weeks for 5 years results in the following equity curve (red line)  compared to the S&P 500 (blue line) and overall returns of 481%:



During periods of high volatility and market drawdowns, this system performed well, moving inversely to the S&P 500.  It is still a high-risk system, in my opinion, with periods of high volatility and under-performance. Consider, for example, the 2 year returns, which exclude the large market decline of 2008 and early 2009 that contributed significantly to the high 5 year returns of the system:



It is important to note these tests are not comprehensive and it is difficult to draw long-term or broad based conclusions from them. Leveraged ETFs can be used as a hedge but their effectiveness and risk vs reward, especially in terms of higher volatility, should be studied and considered carefully by investors on an individual basis.


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GMO 7-Year Asset Class Forecasts

GMO released its monthly 7-Year Asset Class Forecasts for the end of February.  The document can be viewed on GMO’s site with free registration required.

A summary is below, and indicates that in GMO’s opinion most asset classes were priced to under-perform the 6.5% long-term historical US equity return.

Returns are real-return forecasts with a long term inflation assumption of 2.5%.

Asset Class Annualized Return Over 7 Years
US Large -0.1%
US Small -2.7%
US High Quality 4.3%
Intl Large 1.8%
Intl Small -0.6%
Emerging 4.7%
US Bonds 0.6%
Intl Bonds -0.5%
Emerging Debt 1.9%
Index Linked Bonds 0.3%
Cash -0.7%
Timber 6.0%

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Another Do or Die Point for Equities & Gold

Early last week I provided a market update from Chris Vermeulen (The Gold and Oil Guy), which turned out to be a timely call.  Today he notes another important tipping point, especially for equities via SPY.  Gold is already looking to be on the verge of another rally.

The full, free article can be viewed here.

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4 Methods to Hedge an Equity Portfolio

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Market volatility and drawdowns remind us of the role “hedging” can have in portfolios.  Hedging in its simplest form is purchasing securities in order to reduce portfolio risk. The purchased securities are intended to have negative correlation to the remainder of the portfolio in order to help offset any potential losses in the portfolio.

Holding uncorrelated assets, such as stocks and bonds, are one of the most popular methods for reducing portfolio risk since historically stocks and bonds are relatively uncorrelated.  There are other methods methods for hedging downside risk and this article explores four methods for hedging long equity positions.

Moving Average
One of the more popular methods for minimizing downside risk and one I track frequently on Scott’s Investments is to exit long positions when they fall below a long-term moving average.  This may not technically be a hedge, since the entire position is exited.  However, as Faber showed in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets, it is an effective method for reducing volatility and risk in a portfolio.

There are other options for investors who hold individual equity positions and hedge. For example, say you hold a position in two stocks, ABC and XYZ and wish to hold both stocks for the long-term.  However, the overall equity market has you a bit nervous and has recently begun to struggle, showing signs of weakness. One option would be to short the overall equity market and one of the simplest ways to do so would be via a 1x inverse ETF such as SH (Proshares Short S&P 500), which seeks daily investment results that correspond to the inverse of the S&P 500 Index.  You could also use an inverse small cap, international, sector, etc. ETF depending on the long positions you currently hold.

I most recently back-tested an example of this moving average hedge system in March 2010.  I used AlphaClone to generate my individual stock holdings.  I then shorted the S&P 500 in an equal amount (100% hedged) only when the S&P 500 closed below its 10 month simple moving average.  The system did not have a down year since 2000.  While much of the performance can be attributed to AlphaClone‘s ability to find stocks with hedge fund support, the hedge did its job in reducing volatility and drawdowns:

          Clone   S&P 500

CAGR 23.84% -0.53%
Vol 15.49% 16.02%
Max DD -17.50% -50.95%



                  Clone                 SP500                       +/-
2000 29.68% -8.2% 37.88
2001 20.18% -11.9% 32.08
2002 2.07% -22.1% 24.17
2003 38.10% 28.7% 9.4
2004 31.81% 10.9% 20.91
2005 18.44% 4.9% 13.54
2006 20.39% 15.8% 4.59
2007 14.26% 5.5% 8.76
2008 12.25% -37.0% 49.25
2009 41.30% 26.5% 14.8
2010 4.63% 3.1% 1.53

Relative Strength


Using ETF Replay, we can compare the relative strength and volatility of ETFs and backtest various ETF strategies.

Assume we hold a portfolio of 5 ETFs – BND (bonds), DBC (commodities), VEU (international equities), VNQ (REITs), VTI (US equities), which represent 5 major asset classes.  A buy and hold portfolio since 2008 had 22.4% volatility and a -46.28% drawdown  (despite being allocated across 5 seemingly diverse asset classes) and, frankly, disappointing results (results from ETF Replay include dividends):

I created a portfolio of SPY (long S&P 500), SH (short S&P 500), and SHY (short-term treasuries, used as a close proxy for cash).  I went long whichever of the three had the highest combined ranking as determined by the highest relative strength over the past 3 months and 20 days, and lowest volatility over the past 20 days.  The system rebalanced semi-monthly (for those looking to limit turnover the monthly re-balance returns were slightly lower but similar to semi-monthly), produced the following results. While volatility was  high, which is to be expected when only holding one position, returns far outperformed a long only strategy (SPY), which was also to be expected given the market volatility of 2008:

How could one use this information to hedge? If an investor held 50% of a portfolio in the 5 ETF portfolio referenced above and allocated the other 50% to the SPY,SH,SHY strategy, we reduce volatility and drawdowns during one of the most volatile periods in recent history, and still produced solid returns. This is mainly owed to positions in SH which hedge the positions in the 5 ETF portfolio that were highly correlated in 2008.  I used a 50% allocation to both strategies for simplicity and not as a recommended allocation:

Market Conditions

A third hedging strategy is to based long/short positions on overall market conditions.  There are a myriad number of ways to gauge “market conditions” and how one hedges these “conditions” depends on your time-frame and current portfolio.  However, assume we hold a portfolio of US equities or US equity ETFs and wish to hedge them during “unfavorable” market conditions.

I am a big fan of the analysis at dshort.com, and pay close attention to the P/E Ratio Market Valuation updates. Ideally, we could employ a hedge when the market is “overvalued”. However, markets can stay over and undervalued for lengthy periods of time, sometimes years.  Thus, basing  a hedge on relative long-term market valuation alone can be a costly and lengthy experiment.

Stockscreen123 has devised a timing system suitable for longer term investors that has historically still reacted quickly enough to serve as a hedge during unfavorable market conditions.  The system uses 2 factors to determine “market conditions”:

 It assumes conditions are favorable for equity investing if EPS estimates are rising and if valuations are reasonable.

  1. The estimates test is whether the 5-week moving average of the aggregate of the consensus current-year estimates for S&P 500 companies is above the 21-week moving average.
  1. The valuation test is based upon risk premium, specifically, whether the S&P 500 risk premium (earnings yield minus 10-year treasury yield) is above 1%

When conditions are “favorable”, one would be long equities (hold SPY) and during unfavorable conditions, short equities (hold SH).  Re-balancing every 4 weeks for 5 years results in the following equity curve (red line)  compared to the S&P 500 (blue line):

During periods of high volatility and market drawdowns, this system performed well, moving inversely to the S&P 500, and could have served as a functional tool for determining when to hedge equity (or other) positions.

The current signal indicates favorable market conditions and a position in SPY.

Technical Analysis

Technical analysis can also serve as a method for determining when to hedge long positions. If an investor is comfortable and skilled enough in conducting his or her technical analysis, then during periods of high uncertainty or unfavorable technical setups, either in a market index or in an individual position, a hedge may be appropriate. The hedge could again be a short position in an index ETF or could be an options position on an individual holding.

Technical analysis is a broad subject with many tentacles so a comprehensive review is not possible.  However, as a general rule, support and resistance lines and trend lines are good starting points for analyzing technical setups and I wrote about one such setup last week with Chris Vermeulen giving us an example in this  chart of what he saw headed into the week of the 14th (chart courtesy of The Gold and Oil Guy):

This article should not be considered a complete list of hedging methods as there are myriad others ways to hedge a portfolio (options being a popular method which was not discussed here). Hopefully it served as a starting point for further considerations on how and when to hedge equity positions and your portfolio as a whole. 


Returns discussed excluded commissions and taxes.


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10 Micro-cap Value Stocks

I am a member of AAII (American Association of Individual Investors) and one of their more popular screens is the Shadow Stock Screen.  I conduct a close replication of this screen on a monthly basis.  This is a very simple screen that seeks out small/microcap value stocks.  The screen criteria I use within stockscreen123 are:

  • No over-the-counter stocks
  • No financial stocks
  • Market cap > $20 Million and < $200 million
  • Previous EBITDA quarter and trailing twelve months are positive
  • Share price > $1
  • Price/book < .80
  • Price/sales < 1.2
  • Top 10 stocks are selected based on highest 52 week returns
  • Minimum average daily volume > 5k shares

This is the tenth month of performing the screen. Decembers results averaged 12.29% for the 10 stocks, led by Silverleaf Resorts’ (SVLF) return of over 38% in 4 weeks and Fuwei Films (FFHL) 34% 4 week return (returns are hypothetical and exclude commissions and taxes, low cost trades are always one option to avoid commissions).  The most recent month this strategy returned an average of -5.44% in four weeks.  As I have repeatedly stated this strategy tends to be high beta – it performs very well in bullish markets and may underperform in bear markets.  Clearly, it has been very profitable in recent months as equity markets continue to rise and last month struggled as markets struggled.
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One option is to abandon this type of strategy or move to cash when an underlying index such as the Russell 2000 is trading below a long term moving average such as the 200 day moving average.  Currently the Russell 2000 is above its 200 day moving average.  Another consideration is to hedge the strategy by shorting a small cap ETF or purchasing an inverse small cap ETF. 


Ticker Name Trend MktCap Pr2SalesTTM Pr2BookQ EBITDATTM EBITDAQ Pr52W%Chg
FFHL Fuwei Films (Holdings) Co., L Here 50.85 0.81 0.63 9.23 4.12 238.26
ABL American Biltrite Inc. Here 30.94 0.15 0.62 7.51 1.01 164.42
GFN General Finance Corporation Here 70.66 0.41 0.64 25.67 9.2 142.24
ESCA Escalade, Inc. Here 68.99 0.58 0.8 12.66 3.47 113.33
SVLF Silverleaf Resorts, Inc. Here 92.67 0.41 0.45 51.6 9.87 100.83
SURW SureWest Communications Here 173.75 0.71 0.63 77.02 20.77 29.38
COBR Cobra Electronics Corporation Here 23.15 0.21 0.66 5.74 2.84 28.73
SCX The L.S. Starrett Company Here 74.47 0.33 0.61 16.75 5.21 25.8
WCAA WCA Waste Corporation Here 132.44 0.58 0.64 53.13 12.74 24.95
BLD Baldwin Technology Co. Here 24.55 0.16 0.45 2.39 0.27 20.77

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Backtesting this strategy the past 5 years including .5% for slippage, with no commissions or taxes accounted for, results in:

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Market Outlook
Read more on Hang Lung GRP, Value Investing at Wikinvest