Silver and Natural Gas Update

Last week I shared two charts which caught my eye, silver and natural gas.  Silver had a wild ride last week after, breaking above the 10 month downward sloping trendline on Tuesday. This move looked to be a bullish signal, but the metal broke down strong on Wednesday after testimony from Ben Bernanke led many traders to believe further Federal Reserve monetary stimulus was not imminent.

As Peter Brandt noted, the silver market saw its second highest weekly volume since April.  The fact that the volume surge happened in conjunction with a downward price move could be a warning sign for longs.  The 38.2% fibonacci price level is also worth watching at $35.16. The silver market closed below this level Friday, reversing the move earlier in the week above this level:

Natural Gas drifted lower last week, continuing the long-term negative trend. It had been forming a short-term symmetrical triangle and last week’s finish looked to be a break below that short term triangle in addition to a break below the longer term down channel:

In my market readings for this weekend I posted an article from The Reformed Broker on the potential Trade of the Year.  The long and short-term trend is still negative for Natural Gas, but the author analyzes the potential for an eventual reversal in Natural Gas.  For now patience is warranted before any potential long position; meanwhile, shorts have seemingly had nothing significant to fear for months…

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Silver Poised to Move

This weekend I noted the interesting technical patterns forming in Silver and Natural Gas. Silver (SLV) remains a tightly wound spring after today’s relatively calm action. As the daily chart below shows SLV has technically closed above the trendline, a potentially bullish sign of a trend reversal.  However, given the close proximity to the trendline a more decisive move above last week’s high of $34.65 is needed before more bullishness is warranted. In addition, as a later chart will show, the silver futures market has yet to close above its trendline.

The chart from my earlier article also showed the fibonacci retracement levels from the April 2011 high to the December low.  SLV closed $.04 above the 38.2% retracement level today. The 38.2% level also coincides closely with a key resistance level (shown on the next chart):

The key resistance levels are shown below and they coincide with the gaps in September.  The first hurdle is a close above $34.50 and then the next price target is $37.94:

Chris Vermeulen analyzed the silver futures market today and noted “They [silver and gold miners] have yet to break through their key resistance levels. That being said it could happen an day now as they have both been flirting with that level for a couple trading sessions now.” His chart is below:

Silver futures drive the price of SLV, so the futures market is the most important to watch when analyzing the primary driver of SLV.

My Bottom line: SLV is close to an explosive breakout but first needs to close above $34.50-$34.65 before confirmation. Whether the next move is up or down, we should know  within hours or days.

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Silver and Natural Gas Charts

As much as I try to focus on anything but financial charts and technical analysis, I still find myself drawn to them in my spare time.

Below are a couple of charts I shared this morning on my Stocktwits stream and via twitter.

The Silver chart is posted on Chart.ly here, below is the image:

The Natural Gas chart is posted on Chart.ly here, below is the image:

My interpretation of both patterns is that a bigger move is on the way this week.

Silver futures clearly looks to be breaking out to the upside; however, a failure to break to a new high early in the week could mean further weakness.  It closed about the 38.2% retracement level of $35.13 on Friday and hit resistance at $35.75.  Thus, it is wedged tightly between  these two price levels and I do not expect that to last long.

Natural gas on the other hand could move either way but I expect action early in the week could dictate the next trend.  It is forming a symmetrical triangle pattern and the long term trend is clearly negative. However, price action in recent weeks has shown some strength so one interpretation is that the break above or below the triangle pattern drawn in the chart above will dictate the next big move.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Building a Permanent ETF Portfolio, Part 2

Earlier this week I proposed a 14 ETF portfolio intended to replicate the popular Permanent Portfolio mutual fund, PRPFX.  My original 14 ETF portfolio was intended to replicate PRPFX as closely as possible using liquid ETFs. The 14 positions could realistically be reduced to 8 while still maintaining a high correlation to the original 14 ETF portfolio.

The original 14 ETFs are listed below:

Ticker Name Allocation
FXF Swiss Franc CurrencyShares 10.00%
GLD SPDR Gold Shares 20.00%
HYG iShares iBoxx High-Yield Corp Bond (4-5yr) 5.00%
IEF iShares Barclays 7-10 Yr Treasury (7-8yr) 5.00%
IGE iShares S&P N. Amer Nat. Resources 5.00%
VUG Vanguard MSCI U.S. LargeCap Growth 7.50%
IWO iShares Russell 2000 Growth 7.50%
LQD iShares iBoxx Invest Grade Bond (7-8yr) 5.00%
RWX SPDR DJ International Real Estate 5.00%
SHY Barclays Low Duration Treasury (2-yr) 5.00%
SLV iShares Silver Trust 5.00%
TIP iShares Barclays TIPS (4-8yr) 10.00%
TLT iShares Barclays Long-Term Trsry (15-17yr) 5.00%
VNQ Vanguard MSCI U.S. REIT 5.00%

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If we consolidate the stock and bond holdings, we are left with an 8 ETF portfolio that still closely maintains the stated portfolio structure and asset allocation  of PRPFX and, as we will see below, has been highly correlated to the 14 ETF portfolio:

AGG iShares Barclays Aggregate Bond (4-5yr) 35%
FXF Swiss Franc CurrencyShares 10%
GLD SPDR Gold Shares 20%
IGE iShares S&P N. Amer Nat. Resources 5%
RWX SPDR DJ International Real Estate 5%
SLV iShares Silver Trust 5%
VNQ Vanguard MSCI U.S. REIT 5%
VUG Vanguard MSCI U.S. LargeCap Growth 15%

Using ETFReplay.com, we see that both portfolios have shown a high correlation since 2008:

The 8 ETF portfolio had CAGR of 8.4% and a max drawdown of -25.25%. When we compare the 8 ETF portfolio to a 50/50 portfolio consisting of 50% SPY and 50% AGG, we see that the Permanent 8 portfolio significantly outpaced a 50/50 portfolio since 2008 with about the same volatility:

 

One of my favorite tools for potentially reducing portfolio volatility and drawdown is to use the 10 month simple moving average strategy, popularized in recent years by Mebane Faber in The Ivy Portfolio: How to Invest Like the Top Endowments and Avoid Bear Markets.

For example, the Permanent Portfolio has a 20% allocation to Gold, which is in the midst of a bull market.  When and if Gold begins a bear cycle, it could be a significant drag on the portfolio. By using a long-term moving average signal, we could potentially reduce portfolio drawdown created when any one of the holdings enters a bear market.

The results for a 10 month moving average system on the 8 ETF Permanent portfolio are below (2008-present). When an ETF in the portfolio was below its 10 month moving average at month-end, the position was sold and held in “cash” (SHY was used as the cash position). When it closed the month above its 10 month moving average, the ETF was purchased and held until the close of the next month:

The results were not as dramatic as I expected. Portfolio drawdown was reduced to -16% versus -25.25% for buy and hold of the same portfolio. Volatility was reduced slightly to 11.5% and total return actually increased slightly to 41.4%. An improvement in all areas, yes, but not significant.

Finally, what if we simply purchased the 2 ETFs with the strongest momentum within the Permanent 8 ETF portfolio? This is a similar strategy used in my monthly ETF Replay Portfolio. Purchasing the 2 ETFs out of the 8 with the highest 6 month returns and rebalancing monthly yield the following results (2008-present):

If we purchased the top 2 ETFs as gauged by a combination of their 6 month return, 3 month return, and 3 month volatility, and rebalanced monthly, the results are below:

If we reduce the time frame to a 3 month return, 20 day return and 20 volatility, the historical results are better:

Holding only 2 ETFs increases portfolio volatility, which should be expected, but did not necessarily increase returns versus buy and hold or the 10 month simple moving average system.

The goal here is not to identify “the best” solution, since past results are no guarantee of future returns. It is to propose a relatively simple ETF portfolio to mimic PRPFX and to explore and test additional risk management and trading techniques within the ETF portfolio.

Note: All return calculations provided by ETF Replay. All returns are hypothetical and exclude commissions and taxes.

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Creating a Permanent ETF Portfolio

The Permanent Portfolio mutual fund, ticker PRPFX, is a popular mutual fund from the Permanent Portfolio Family of Funds with the stated investment objective “to preserve and increase the purchasing power value of its shares over the long term”. The fund has performed relatively well in recent years when compared to the S&P 500 and has underperformed the S&P 500 since the funds inception (12/1/82). For full performance statistics visit the fund’s site or view the fact sheet here (opens pdf file)

The fund’s “portfolio structure” shows the Target Percentages for the Permanent Portfolio:

Gold 20%
Silver 5%
Swiss Franc Assets 10%
U.S. and Foreign Real Estate and Natural Resource Stocks 15%
Aggressive Growth Stocks 15%
U.S. Treasury Bills, Bonds and Other Dollar Assets 35%

This portfolio structure helps explain the fund’s performance in recent years as Gold, Silver, and US Treasuries have performed relatively well.  According to the fund’s fact sheet the top 10 holdings, as of 12/31/11, were:

Gold Coins 13.88%
Cash and Cash Equivalents 7.09%
Gold Bullion 5.34%
Swiss Franc Bank Account 5.46%
Silver Bullion 4.08%
U.S. Treasury Bonds 6.00% 2-15-26 1.17%
U.S. Treasury Bonds 6.25% 8-15-23 1.16%
U.S. Treasury Bonds 5.25% 11-15-28 1.12%
U.S. Treasury Bonds 4.50% 2-15-36 1.06%
U.S. Treasury Notes 7.25% 5-15-16 1.04%

I read on World Beta the other day that Global X had filed for a Permanent Portfolio ETF. It will be interesting to see how this new ETF looks once it is launched.  However, an investor could also look at the stated portfolio structure of PRPFX and try to replicate it using ETFs.

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I created an “Permanent ETF Portfolio” using ETFReplay.com.  It is not possible to exactly replicate PRPFX, since its holdings change frequently and it holds individual stocks.  However, I did use its stated portfolio structure to create an ETF portfolio with the following allocation:

Ticker Name Allocation
FXF Swiss Franc CurrencyShares 10.00%
GLD SPDR Gold Shares 20.00%
HYG iShares iBoxx High-Yield Corp Bond (4-5yr) 5.00%
IEF iShares Barclays 7-10 Yr Treasury (7-8yr) 5.00%
IGE iShares S&P N. Amer Nat. Resources 5.00%
VUG Vanguard MSCI U.S. LargeCap Growth 7.50%
IWO iShares Russell 2000 Growth 7.50%
LQD iShares iBoxx Invest Grade Bond (7-8yr) 5.00%
RWX SPDR DJ International Real Estate 5.00%
SHY Barclays Low Duration Treasury (2-yr) 5.00%
SLV iShares Silver Trust 5.00%
TIP iShares Barclays TIPS (4-8yr) 10.00%
TLT iShares Barclays Long-Term Trsry (15-17yr) 5.00%
VNQ Vanguard MSCI U.S. REIT 5.00%

I then tested this portfolio as a buy and hold portfolio since 1/1/2008.  Any backtest using ETFs is limited by the trading history of the ETFs themselves; thus, I started this backtest in 2008 since some of the ETFs listed began trading in 2007.  It is difficult to draw significant long-term conclusions from such a short test, but it is interesting to compare the results to PRPFX. The results from 1/2/08 – 2/2/12

A then ran a 3 year test from 12/31/08 – 12/30/11.  The 3 year return statistics are similar when compared to the data provided on the fact sheet for PRPFX which showed a 3-year return before taxes of 13.21%:

 

I then decided to add a twist to my hypothetical “Permanent ETF Portfolio”. What if, like some of my other momentum and tactical portfolios, we only held the ETFs in the portfolio when they were above their 10 month moving average?  My expectation was that the portfolio drawdown and volatility would be reduced, since the “Permanent ETF Portfolio” had a drawdown of -26.52% (still significantly better than SPY’s 51.88% over the same period) and volatility of 12.1%.

When an ETF in the portfolio was below its 10 month moving average at month-end, the position was sold and held in “cash” (SHY was used as the cash position). When it closed the month above its 10 month moving average, the ETF was purchased at the stated allocation. This is a similar strategy to that used in Faber’s Ivy Portfolio. The results for this added test, for 2008-2011, are below:

 

Note: HYG was excluded from the first month of this test (January 2008) since it did not have sufficient trading history to generate a 10 month moving average until the following month.

As you can see, returns were similar to our previous test but volatility and drawdown both decreased.  The strategy returned a modest 7.9% annually but did so at 8.1% volatility and a max drawdown of -9.2%. It also posted a 1.8% return in 2008, when SPY returned -36.8%. However, during SPY’s bull run of 2009 when it returned 26.4%, this Permanent ETF Portfolio returned a modest 10.7%.

Please note all results are hypothetical and commissions and taxes were not included in the results. No positions in securities mentioned

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Investment Readings

Below are some investment related articles I am reading this week:

Is Silver the Great Trading Opportunity of 2012-2013? John Carlucci

Is Decoupling Possible in a Global Economy? MacroTides courtesy The Big Picture

Staring Into the Abyss (pdf) – John Mauldin

Working Out of Debt (pdf) – McKinsey Quarterly via Mauldin

The Hangover – The Economist

Fed: Benchmark Rate Will Stay Low Until ’14 – Bloomberg

 

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Gold and Silver on the Verge of a Big Move: Vermeulen

Gold and silver could be on the verge of a big move according to Chris Vermeulen of The Gold and Oil Guy.  His rationale on gold is (chart available in full article) “at this point it is holding a key support level. If we see the dollar breakdown below its green support trendline then I expect gold to have a firm bounce to the $1675 – $1700.”

The full article is available here.

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Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Long Term Analysis of Gold, Silver, and Currencies

Below is a an article from Chris Vermeulen that takes a longer term look at gold, a Gold Investment, silver, stocks (SPY) and currencies like the US Dollar:

The Currency War Big Picture Analysis for Gold, Silver & Stocks

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Monday Night Readings

Below are a few articles I’m reading early this week:

How to Trade Gold and Oil Prices this Coming Week – Chris Vermeulen

The Eurozone Wags the Gold and Silver Dog - JW Jones

McClellan Oscillator Confirms New Uptrend – Tom McClellan

Penny Wise and Euro Foolish - John Hussman

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Do Bullish Investors Have an Ace in the Hole? Frank Holmes via Investment Postcards from Cape Town

Tactical Shift in Portfolios: Reducing Cash – Barry Ritholtz

The Only Way to Save the Economy: Break Up the Giant, Insolvent Banks – Washington Blog via The Big Picture

Video: Financial Alchemy and the Breakdown of Faith in Financial Markets – Satyajit Das

Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments and its author is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com

Wednesday Investment Readings

How and When to Buy More Gold and Silver – Chris Vermeulen

The King Report: Parsing the Fed – Bill King, courtesy of The Big Picture

Macro Tides: How Much Longer?

The Road Ahead: Is it Inflation or Deflation? (pdf) Pring Turner Capital Group

Textbook Bear Flag: S&P 500 Target Under 1,000 Explained – The Disciplined Investor

Roque on Gold’s Pullback (courtesy The Big Picture)

Catastrophic Success (pdf) – John Mauldin

Absolute Zero (pdf) John Mauldin

Not Over by a Longshot – John Hussman

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Disclaimer: No current positions in stocks mentioned. Please note that Scott’s Investments is not a financial adviser. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of Scott’s Investments.

More on this topic (What's this?)
Pricing Gold in the Real World
More Downside Ahead for Gold and Silver
Read more on King, Gold at Wikinvest
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Disclaimer: Stock Loon LLC, Scott's Investments and its author is not a financial adviser. Stock Loon LLC, Scott's Investments and its author does not offer recommendations or personal investment advice to any specific person for any particular purpose. Please consult your own investment adviser and do your own due diligence before making any investment decisions. Please read the full disclaimer at the bottom of www.scottsinvestments.com