Metals Are Hot, Bonds Are Toast

Metals, Swiss Francs, Miners and S&P 500 Benchmark

Metals, Swiss Francs, Miners and S&P 500 Benchmark

PALL -  Palladium Metal ETF (holds physical metal)
GLD  -  Gold ETF  (holds physical metal)
SPY  -  S&P 500 Benchmark Index
JJT  -  Tin ETF
JJC  -  Copper ETF
FXF  -  Swiss Franc
PPLT -  Platinum ETF (holds physical metal)
GDXJ -  Junior Gold Miner ETF
SLV  -  Silver ETF (holds physical metal)
PAAS - Pan American Silver Corp - Silver miner

We last looked at the metals trade about a month ago in this posting:

https://chiefio.wordpress.com/2010/09/11/metals/

And it’s nice to note that the trend call was a good one. Especially the pick of Tin and metals with an industrial double use like Silver and Palladium as an alternative to gold.

We have an ‘early economic recovery’ thesis going on mixed with a “bugger the dollar” trade. Early recovery has materials and cyclical industrials rise (so things like DE Deer, CAT Caterpillar, etc.). In this case, we’re looking in particular at the metals. Pretty much up across the board.

Also of note: The Swiss Franc is just running smoothly up as the US Dollar tanks.

Earlier today we had CNBC reporting (via Rick Santelli, who is ‘colorful’ and knows his stuff) that there was a fairly bad bond auction today. This is the third ‘tepid at best’ in a couple of weeks. Folks are not buying bonds anymore like they were. So what does the bond trade look like?

Long Duration Bonds, vs Gold, S&P 500, a bond short fund, and Euros

Long Duration Bonds, vs Gold, S&P 500, a bond short fund, and Euros

TLT  -  Long duration bond fund
GLD  -  Gold ETF
SPY  -  S&P 500 benchmark
TBT  -  "Short Sell" bonds ETF
UUP  -  Dollar UP ETF
UDN  -  Dollar DOWN ETF
FXE  -  Euro ETF

We’ve got “failure to advance” with the latest peak lower than the prior peak. Prices have crossed THROUGH the moving average stack. (Which have started a ‘weave’). RSI, that had been doing a “50-80-50-80” roll (as things running up tend to do on this time scale) has punched through 50. MACD is “Red on top” headed to below the zero line. DMI is “Red on top”, time to be out. And finally TBT is showing a turn upward.

It’s time to be out of US Bonds and starting a bond short watch / trade.

( I first ‘called the top’ on bonds a little over a month back in this posting:
https://chiefio.wordpress.com/2010/09/04/bonds-are-not-safe/
Kind of nice to have had that call confirmed too. ;-)

While some central banks (like Japan) are buying treasuries to try and support the dollar / weaken their currency, they are being offset by others. In this case, while Japan bought 55 $Billion China was dumping 48 $Billion (IIRC the exact numbers right from the CNBC ticker). China is trying to prevent their currency from appreciating too, but also wants things of value…

As private investors look at their 1% and 2% dividend, but especially foreign investors who see a larger currency loss, and ask “why hold this?”, the run for the exits will pick up speed. As that happens, the “bond short” will start to win. Here’s that chart. Same tickers as above, but with TLT and TBT swapped.

Bond Short Fund vs benchmarks

Bond Short Fund vs benchmarks

We had one nice “swing trade” a while ago in TBT, and I correctly said to exit it when it hit the moving average stack. Now we’ve got it back at the moving average stack, but things are different this time. ;-) We no longer have a falling trend. We’ve “gone flat” with “failure to advance” to the downside. DMI is now “blue on top” and MACD is “Blue on top” with a zero crossing to the upside in progress. Slow Stochastic has already called a ‘trade in’ for the last few days of run. It will likely show another trade soon, but more importantly, as we transition from a ‘bottom roller’ swing trade into a “just short bonds” trend trade, it will tend to either “peg to the top” or do a shallow roll between 50 and 80.

The trend trade will be confirmed once prices have crossed the moving average stack to the top, the stack as re-ordered to be 25 day on top and 75 day on the bottom, and we’ve had prices come back to the SMA stack from the topside and fail to punch through. So we ‘swing trade’ with Slow Stochastic until that point, then we jump on the trend as it confirms for a fairly long run.

How soon? Who knows. It depends on a bunch of central bankers, some hedge funds, major bond trading houses, and a few dozen gorilla sized insurance companies… But when they start to move, the chart will show it.

And yes, I’m not in cash much right now. Mostly on the trades shown here and my “core holdings” (BRKA / BRKB, oil trusts, some Mall REITS, some retail, some energy companies, some high dividend pipeline / CNG shippers, etc.)

FWIW, the charts of EWW Mexico and EWC Canada are also beating the S&P 500 as our dollar tanks and their currency does not. EWA Australia is also doing well as their currency dances with US Dollar Parity…

Canada, Mexico, Australia

Canada, Mexico, Australia

EWC  -  Canada ETF
GLD  -  Gold ETF
SPY  -  S&P 500 Benchmark ETF
FXC  -  Canadian Dollar
EWW  -  Mexico ETF
FXM  -  Mexican Peso
EWA  -  Australia ETF
FXA  -  Australian Dollar

There’s a lot to choose from here…

One word of caution: The Third Friday of each month is options expiration. Markets often select a new direction just after options expiration. So watch this Friday and next Monday closely for any indication of a reversal of these trends.

I don’t expect such a reversal, as these trends are driven more the The Fed than anything else; and The Fed is telegraphing (megaphoning?) the intent to By God Get Inflation and Bugger The Dollar. There was a Fed member on CNBC basically saying it flat out… So until unemployment drops to under 8%, and maybe even under 6%, this set of behaviours ought to remain in place… and that will be a very long time.

Update

TIP is the ticker for Treasury Inflation Protected Securitys Fund. These are bonds with a ‘kicker’ based on the rate of inflation. As inflation is recognized in the official statistics, the rate of return of the bond is adjusted. Market prices reflect that expected adjustment.

Here is a chart of them:

TIP - Treasury Inflation Protected securities vs benchmarks

As you can see, they are presently rising as TLT rolls over. They are not rising as nicely as Gold (GLD) or the Swiss Franc (FXF); but at that point we’re really talking about choosing the optimum trade more than a good investment. Both gold and foreign currencies will have much higher “beta” than a TIP bond; so they will both rise more when rising AND fall more when falling. The “risk” is greater in that they are more volatile than TIPs.

Notice the Euro (FXE) that is presently rising very fast compared to the TIP line. But notice also that it is rising from a big drop about a half year back… So it is outperforming at present, but still has to dig it’s way out of the hole it dug when the PIGS were in the news. (Portugal, Italy / Ireland, Greece, Spain). That’s a good example of Beta biting both ways.

The big ‘takeaway’ for bonds is that the only bond I’d ever own as an investment is a TIPs type bond. (I’ll trade the others for more “beta” trades, though). For folks not in the US Dollar as their home currency, you can get these in other currencies too. The fund “WIP” (World Inflation Protected) is one such fund. You can see how it’s line is similar to the Euro line (it does not protect from currency fluctuations relative to each other, so the dollar rise / fall shows up in a comparison using US Dollars as the reference currency as in this chart). So measured in Euros or other non-US currency, it would show the same kind of ‘steady up’ that TIPs show when measured in dollars (and you would see the TIP line rise, then fall, as the US Dollar did a rise / fall).

Using TIP and WIP to avoid inflation risk is well worth it. And judicious selection between them can let you hedge out currency risk as well.

Update 2 – Picking an Entry Point

This is a static 10 day hourly chart for PALL the Paladium physical metal ETF. Also on the chart are gold (GLD), silver (SLV) and the Euro (FXE). The live chart will be just below it. The purpose of this chart is to show how, at the time you take a position, you are by definition a “day trader” at the entry. Choosing that entry point can be very helpful. For example, on this chart, we see that PALL had a nice entry on Tuesday last. Slow Stochastic “hit 20” followed shortly by MACD and DMI both going to “Blue on top”.

(If you don’t like watching charts every hour [or every 15 minutes for a 15 minute chart, for faster response] you can just put in place a ‘buy if touched’ order above the market price and ratchet it down every so often. Eventually when the dip happens, you get ‘bought in’ on the reversal. Like a “stop loss” for exiting, you could think of it as a “start gain” ;-)

To see this chart clearly, click on it for a larger version without the compression artifacts / blur…

PALL Paladium Physical metal ETF, with Gold, Silver and the Euro

PALL Paladium Physical metal ETF, with Gold, Silver and the Euro

Today is Friday. Notice how last Tuesday was a nice entry? I’d expect next Tuesday might be a nice one too… (Though what I expect is never as important as what the charts say… “Expecting at the market” is something you can not stop doing, but it is something you can ignore when the indicators say something else…)

The live chart:

PALL Paladium ETF - Live Chart, with Gold, Silver, and FXE the Euro

PALL Paladium ETF - Live Chart, with Gold, Silver, and FXE the Euro

So at this point I’m watching for the ‘nice entry dip’ to round out my positions. Only when we have the next rise fail to advance is the trend over. So until you have a ‘failure to advance’, “The trend is your friend” and you “buy the dips”.

(Though with that said, this trend has run quite a ways, so we might easily have a a reversal “soon”. But until The Fed stops buggering the dollar, I doubt it…)

Oh, what the heck. A 15 minute chart.

I usually don’t use a 15 minute interval chart, but sometimes they are fun to look at. This is “rabid day trader” country. But since I talked a bit about the daily market here’s a 15 minute chart to look at:

15 Minute interval of PALL Paladium with PPLT Platinum and others

15 Minute interval of PALL Paladium with PPLT Platinum and others

Yeah, really jumpy and schitzo… Day trades are like that…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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15 Responses to Metals Are Hot, Bonds Are Toast

  1. Pingback: Tweets that mention Metals Are Hot, Bonds Are Toast « Musings from the Chiefio -- Topsy.com

  2. mrpkw says:

    “Bonds are toast”.

    You wouldn’t buy an “Inflation Protected bond fund”?

  3. E.M.Smith says:

    @mrpkw: Good point!

    I’m very fond of TIPs (Treasury Inflation Protected securities) and they are the only kind of bond I’d hold long term. I tend to think of them as a special case, though, so leave them out of the generic “what’s happening to bonds” comparison.

    I probably ought to break that habit…

    I’ve added an update with a TIPs chart. Included on it are some reference currencies along with gold and the S&P 500, but also the WIP ticker. That is a “World Inflation Protected” bond fund. Similar to TIPs, but in other currencies.

    So the direct answer is: Yes, I’m always happy to buy an inflation protected bond or bond fund (provided the protection tracks inflation well); but often don’t because as a trader I’m looking for high “Beta” trade vehicles more than I’m looking for low “beta” slow and steady investments. Oddly, I’ve got some TIPs in my spouses account. In her accounts I buy “slow and steady investments”…

    If folks are interested, I can include a “slow investments” corner in my financial postings. It’s not very “juicy” in that things don’t change very often and you don’t get much “rush” from rapid gains, but it’s a nice “sleep well” approach. (From the market aphorism that “You can eat well or you can sleep well, but not both.”)

  4. mrpkw says:

    This is what it is:

  5. E.M.Smith says:

    This might be a bit more readable for some folks:

    http://finance.yahoo.com/q/hl?s=TIP+Holdings

    http://finance.yahoo.com/q/pr?s=TIP+Profile

    And I probably ought to swap my TIP for WIP while the dollar drops… but that’s starting to look like a currency trade…

    http://finance.yahoo.com/q/hl?s=WIP+Holdings

    http://finance.yahoo.com/q/pr?s=WIP+Profile

    Holdings as of Jun 30, 2010 Get Holdings for:

    Overall Portfolio Composition (%)
    Stocks: 0.00
    Bonds: 78.67

    Top 10 Holdings (45.78% of Total Assets)
    Company Symbol % Assets
    France(Govt Of) 1.07943% N/A 4.77
    France(Govt Of) 1.78968% N/A 3.91
    France(Govt Of) 2.56835% N/A 6.17
    Germany(Fed Rep) 1.60398% N/A 3.27
    Japan(Govt Of) 1.0901% N/A 4.86
    Sweden(Kingdom Of) 4.90167% N/A 3.46
    Turkey(Rep Of) 9.86678% N/A 3.45
    United Kingdom (Government Of) 1.41842% N/A 8.55
    United Kingdom (Government Of) 2.00773% N/A 4.15
    Utd.Mexican States 5% N/A 3.19

    Reasonable mix of countries and currencies.

  6. Gnomish says:

    We swapped cdn for usd at 98.6 (to lock it in and not be greedy).
    Yesterday it touched parity, too.
    Did you realize that Canadian bonds can be purchased in usd on the nyse? When that gets built up and when China wants to express disapproval over protectionism the usd is so good to short.

    I’m expecting another push around mid November, but it’s just a guess about what has to happen. Inevitabilites can be postponed if there is a handy victim.

    Another prediction? Real estate in specific areas starts to reverse this May.

    When the music stops, there are only 3 chairs… The band sure seems tired and ready for a break, too…lol

    Ciao for nao!

  7. E.M.Smith says:

    Metals are taking a bit of a dip today (most likely traders who where long metals all week selling out ahead of the weekend along with some folks clearing positions at options expiration). This is most likely a nice set up for ’rounding out’ positions. I’ve got fairly modest positions at present (having bought into the trend a bit late several days back) so I’ll be looking for the bottom of this ‘dip’ as a buying opportunity.

    As a reminder, there are specific indications of a bottom of a dip and when to buy. Slow Stochastic on the bottom. Williams %R on a bottom. Crossovers to the topside. Etc.

    https://chiefio.wordpress.com/2009/06/03/choosing-a-stock-entry-point/

    I’m going to add I’ve added a 10 day hourly example above for folks to look at. So far the ‘dip at the open’ is already faded a bit. We’ll see. Things often rise a bit from a dip until about 1 pm Eastern, then resume the original trend. (Open excursion, reversal to test, resumption of trend, fade at the close. That’s the ‘typical’ daily pattern. Though it is often violated. Especially on surprise daily news.)

    Just for fun, I’ve added a 15 minute “day trader” chart. You can see how the MACD crossover and cross of the zero line makes for nice trades, Momentum confirms what side of the trade to be on, and DMI (that is normally a slow lagging indicator) gives decent ‘in / out’ selectivity too. But you have to watch the market all day long to do this… and a live data feed (instead of the usual free 20 minutes delayed) is important too..)

  8. Jay Reed says:

    I would like to see a “slow and steady” corner. It would fit my personality much better.

  9. Paul Hanlon says:

    I think the Fed are right in letting the Dollar slide, because it will improve America’s competitive position no end, what with it being the reserve currency and all.
    It will also force the Chinese to decouple from the dollar and make them share some of the burden of driving the world economy.
    Sure, it is going to hurt people on this side of the pond, but it should knock some sense into our so-called intelligentsia and force them to reduce the bureaucracy that they’ve heaped onto the rest of us. We’ve been living on the back of the strong Dollar for long enough.

  10. Paul Hanlon says:

    Damn, hit the submit button too quick.
    Alexander Elder, he of the Elder rays and Force Index, reckoned you could build a trading system by watching what an entity did in the first half hour of trading, and fading that for the day. Would that be in line with what you’re talkiing about?
    Also, what do you think of Michael O’Higgins’ “Beating the Dow”, kind of a Dogs of the Dow, Motley Fool Four strategy?
    I often thought using 1yr or 2yr options as a force multiplier would make for a good long term trading plan. Not as “beta” or immediate as your way, but less work.

  11. E.M.Smith says:

    @Jay Reed: OK, then I’ll add an “Investors corner” to the WSW postings. I actually do all the work already (as that is how I manage my spouses portfolio) so it isn’t much to add. As it is, I’ve been running about equal returns between the two styles and “value with patience” takes a lot less attention….

    @Paul Hanlon: Just because they are right does not mean I’ll be happy with what it does to me personally… Yes, we have “no hope” other than to “bugger the dollar” and screw China (and anyone else holding long duration US bonds); but it’s still an immoral act and a terrible thing to do to the value of the US Dollar. Have I mentioned lately that economics is named “The Dismal Science” for a reason? …

    And yes, i”m willing to start buying TBT as this unfolds to make money off of it. I’m moral, but I’m not stupid. 8-}

    FWIW, the “Elder” book “Welcome to my trading room” (or something close to that) is the basis of my “system”. I took his indicators and translated them into more publicly available forms. He knows his stuff, but you don’t need to pay for his proprietary forms of the data…

    Don’t know O’Higgins, but I’ll look him up. He’s got a good name ;-) (He of Irish roots says…)

    One of the great frustrations of my life is that I’m first and foremost schooled as a Deep Value investor. So I run my wife’s portfolio and 1/2 of my portfolio that way. I’m also (h/t/ Elder) working on a decent more lucre oriented trading strategy. And yet my trader self is not significantly beating my investor self!

    Both are making money and in about the same degree (modulo week to week bounces).

    Very frustrating when you can not beat yourself!

    At any rate, I’ll be adding a ‘value investor corner” to the WSW postings and well see which part of me beats the other…

  12. Paul Hanlon says:

    In a nutshell, pick the ten highest yielders in the Dow, and then the five with the lowest price out of those. The Motley Fool discards the bottom one, and just uses the four others, because the bottom one always underperforms. Hold for a year, with a stop loss of 75%, and repeat the next year.
    O’Higgins, who also worked as a broker using the strategy, researched it and found over a 47 year period, it compounded at 18% per annum, through 72-74 and 87-91. It’s a very accessible book.
    There’s a website Dogs of the Dow that keeps an up to date list.
    Apparently, O’Higgins found that September was a good month to start. What I liked about it was the simplicity, and the consistency. And because of the high yield, the option price should be cheaper.
    If I had the capital, I’d use that as my main strategy. I did try trading like you, but I made all the classic mistakes, particularly setting my stop losses way too tight, and getting bounced out of a trade before it had a chance to run.
    Anyway, sorry for monopolising the thread. It’s a subject that always fascinated me.

  13. E.M.Smith says:

    OK, a Dogs of the Dow variation.

    I’ve done that at one point (years back). Later figured out you could waste a lot of time waiting for an upturn to begin.

    What I’d planned to do (but got sidetracked into faster trades) was to make the DofD list, then put them on a “watch chart”. At the moving average stack rollover to the rise pattern, buy, at a failure to advance, sell. (Rather than an arbitrary 1 year cycle).

    Maybe someday…

  14. Mike B says:

    Hey Chief:

    Sorry to bug you with such a basic question, but what exchange is PALL on?

  15. E.M.Smith says:

    http://finance.yahoo.com/q?s=pall

    has it as:

    ETFS Physical Palladium Shares (NYSEArca: PALL)

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