March 2013 archive

Daily Report – March 12th, 2013

There is so much momentum that exists in the markets today ($SPX and dollar up, bonds and commodities down) that as Refined Investors our job is not to predict when that momentum will end, but instead have a game plan for when it does. If we zoom out, what is frustrating to a lot of people (unless you have your life savings in an $SPX index fund or you manage people that do) is that this feels like a countertrend rally. It bothers us intellectually when we think one thing, and then the markets move in the other direction.

That is why confirming momentum and managing risk is so important. Bull moves tend to be deliberate and unimpressive, while bear rallies are breathtaking and something to brag about. Everyone loves to catch the impulse move, but in reality the money is made by managing risk during these times and watching from the sidelines, and then accumulating the big gains when the larger trend resumes. Those that are paid to be in the market at all times (such as mutual fund managers) do not have this luxury, and they must promote their product when it is the flavor of the month and hide from investors during a cyclical or secular bear market in their asset class.

As Refined Investors, we have the luxury of rotating asset classes based on fundamentals and money flows. However, if we are not careful then we can get run over by a stampeding cyclical bull move even if we are correctly positioned overall for a secular bull move. Even if we manage to protect our respective portfolios during a countertrend move, a lot of times the biggest damage is done to our mental capital (the control center sitting on top of our torsos) and we are unable to either commit to the secular bull when it finally resumes or hang on for the full 8 second ride.

We are beginning to see hints of a rotation to other asset classes, but we must remain patient to let the moves develop. Momentum does not die quickly, and nobody rings a bell when it is finally exhausted. We can severely damage our portfolios by frontrunning a top or bottom, and we must continue to be patient as sentiment grows stronger in both directions. At some point, one side of the trade gets too overextended and the market shifts, allowing money to be made in the opposite direction. Until then, manage your risk and position sizes, and let the momentum come to you.

We continue to hold our main long positions in GLD and GDX, and individual potential long entries in SPY, palladium, agriculture, natgas, clean energy, and India have been posted. Keep your expectations the same on every trade, and let the market work for you, not against you.

Good trading all.

Steve Chapman, TRI

Intraday Update – March 12th 2013

With the dollar potentially moving into a potential daily cycle low, we are seeing a lot of action this morning in commodities. Momentum is confirming in many ETFs, and for those Refined Investors that would like to accumulate some additional names (with proper risk management/position sizing – see “A Primer On Risk Management”) there are entries right now in the following (make sure there is enough liquidity for your position size):

  • OIH
  • IEZ
  • PXJ
  • EPI
  • PIN
  • SPPP
  • FCG
  • PBW
  • RJA

Keep everything in perspective, and no trade is better than any other. A lot of commodities have been beaten up for the last 15 months, and it will take time for the rest of the market to move in and support price. Manage your risk, and over time the growth will take care of itself. We continue to hold our long GLD and GDX trades until our target of the 50 MA.

Good trading all.

Steve Chapman, TRI

The Grapes Of Wrath

In John Steinbeck’s classic 1939 depression-era novel, the Joad family is displaced from their Oklahoma home because of the drought, poor economy, and changing financial landscape. Tenant farming is no longer viable, and the bank has foreclosed on their farm. Handbills promise of financial opportunities in California, and many people reluctantly pack up their families and head west in search of prosperity. To Steinbeck, the economic system was impoverishing many to the benefit of those at the top. The Joads faced tragedy and loss on their journey, and upon arrival end up in a situation no better than before.

In today’s Great Recession economy, the baby-boomers are displaced from the comfort of their bond portfolios because of ultra-low interest rates, high unemployment, and the changing financial landscape. Living on a fixed income is no longer viable, and the bank has foreclosed on their homes. Brokers promise financial opportunities in the stock market, and many people reluctantly hand over their nest eggs in search of prosperity. To many, the economic system is punishing savers to the benefit of those at the top. The boomers endure rising taxes and losses to their net worth, and in the end, feel no better off than before.

I don’t have a personal opinion on Steinbeck’s work, but I’m very interested in how cycles in the stock market rhyme with each other, especially in the years after a major equities meltdown. The similarities between the plight of the Joads family and what many investors are experiencing today are unmistakeable, and they both conclude in a departure from everything they have traditionally known…it also provided a nice title for my commodities-related post.

In the meantime, the $VIX is busy pricing in the next millennium of harp playing and grape eating for everyone else. XIV was the big winner as usual, and volume was almost non-existent, possibly in observance of the Spring Break holiday. The dollar formed a swing high, and there are some early signs of money flows into some commodities. While the $CCI (GCC) is still in a confirmed downtrend of lower highs and lower lows, individual names such as sugar, corn, coffee, and natural gas are showing relative strength. Keep watching for momentum to build in these areas, especially if the dollar shows any signs of weakness going forward.

Our mean-reversion positions in GLD and GDX continue to resist further selling, and we would like to add positions in palladium, agriculture, natural gas, and clean energy now that momentum is confirmed. We will look to add SPPP for palladium/platinum (always check the NAV premium on a Sprott closed-fund before buying), RJA for agriculture (if you prefer not to purchase an ETN, then pass on this one, but DBA is not confirming yet), FCG for natural gas, and PBW for clean energy. All of these ETFs are confirming momentum and have realistic entry points. Refined Investor subscribers know where we place our exit points and how we determine position size before we enter any trade, so keep risk management as your top priority. We will also keep our eye on silver to see if it can generate additional momentum, because unlike GLD and GDX, a mean-reversion signal was never generated.


March 11th SPPP Daily


March 11th RJA Daily


March 11th FCG Daily


March 11th PBW Daily


We have OPEX on Friday and then a Federal Reserve meeting next week, so stay patient and continue to watch these markets develop momentum. For those in the SPY long trade, moving your stops up above the gap from last Tuesday at 153.64 will capture some more of your gains while minimizing risk.

Good trading all.

Steve Chapman, TRI

A Golden Opportunity, With A Silver Lining

The jobs number was much better than expected, and with the unemployment percentage dropping to 7.7%, it was the perfect opportunity for commodities to get monkey-hammered into oblivion…but they didn’t. In fact, the $CRB and $CCI indexes continued to augment the swing lows that they had formed Thursday. Precious metals, who typically have about as much chance of showing strength on a good employment report as Rudy does against the entire Notre Dame offensive line, made an immediate reversal once the cash market opened. Palladium, which we had been keeping a close eye on, made new 52-week highs today.

What gives?

The answer may lie in the fact that commodities are one of the most hated investments on planet earth right now. They don’t yield anything, they haven’t gone anywhere in roughly 15 months, and most investment advisors are not going to put their neck on the line for a piece of metal, a barrel of oil, or 112,000 lbs. of raw centrifugal cane sugar based on 96 degrees average polarization (a standard ICE sugar futures contract – I just wanted to write that).

If you are reading this report right now, there’s a good chance that you have made the decision to take responsibility for your own investing decisions. I am a big fan of low-fee passive index investments such as those offered by Vanguard or a long-term value portfolio such as Berkshire Hathaway A/B shares. If you want to invest money, turn off your computer, and spend the time instead getting your golf handicap into the single-digits, look at dollar cost averaging into one of those two vehicles and forget about it. Yes, you will be at the whims of the market, but it couldn’t be worse than say, a bunch of NFL players losing everything building a casino in Alabama (just look it up).

As Refined Investors, we are looking for asset classes that are unloved and undervalued, with confirmed momentum or mean-reversion entries, and a sound underlying fundamental backdrop. We don’t want to get into the value-trap quicksand, and we don’t want to prove to the much bigger market that we are right and the price action is wrong. We also don’t want to buy assets that might be going up, but that have very little room for appreciation over the intermediate term, especially on a risk/reward basis. For those of you with cash flow requirements in addition to your salary, your investment mix will have to be modified to accommodate that need, but with the rest of your portfolio you can search out the assets that have higher probabilities of appreciation over the intermediate term. As always, risk management and position sizing is the most important task you perform as an investor – do not let your ego or dreams bypass this first step.

Hedge fund managers are paid on performance, investment advisors are paid on total assets under management, and you are paid on whether your brokerage account is higher at the end of the day. The Refined Investor subscribers know what entries we look for to give us the best opportunities for successful trades over the intermediate-term. Picking tops or bottoms based on any other factor than price action (especially with leverage) is a sure-fire way to destroy your account, or at a minimum subject it to death by a thousand paper cuts. With the exception of a mean-reversion trade, price has to be moving in our favor before we consider jumping in.

Equities have had strong momentum for many years now, and with the exception of the half-cycle low beginning in August 2011, the ride has been fairly controlled for those that were willing to jump back into the pool in 2009. The constant flow of QE has buoyed the move, and for those that need yield, the great migration from bonds to stocks has enhanced it further. That kind of surge does not end like a firework, but rather like a giant ice sculpture that slowly melts until it finally collapses because the weaker areas can not hold up the stronger areas.

Where the $SPX stops, nobody knows, but after rising 130% and approaching a level that has been resistance multiple times in this secular bear, you have to wonder if the first attempt is going to be successful, or instead it will be like me trying to dunk:


On the other hand, there are other areas of the market that might as well have a scarlet letter on them the way that sentiment is right now. What if, at the end of each year since 2001, your broker sent you a statement with the following annual returns on it:

  • 2001 – 1.14%
  • 2002 – 23.96%
  • 2003 – 21.74%
  • 2004 – 4.40%
  • 2005 – 17.77%
  • 2006 – 23.92%
  • 2007 – 31.59%
  • 2008 – 3.97%
  • 2009 – 25.04%
  • 2010 – 30.60%
  • 2011 – 7.80%
  • 2012 – 8.68%

That’s right, not one loss in the last 12 years, with a cumulative gain from January 1, 2001 to December 31, 2012 of 511.84%. Your broker would be some kind of rock star, hosting the Victoria’s Secret Fashion Show and doing the coin toss at the Super Bowl, especially because the $SPX over the same time period is up a measly 8.02% excluding dividends. You would think that everyone would be wanting to jump into this asset, that it’s multiple would be Amazon-like (not the current N/M), and that it would be on the cover of every financial publication in existence. You would think that would be the case. You would think so.

However, this asset is down roughly 5.5% in 2013, and investors are currently not viewing it as a sale but as the end of a lucky winning streak. Sentiment on this asset according to MarketVane is the lowest since 2001, newsletters are recommending a net short position, and large speculators in the futures market are holding the largest number of short contracts since Feb. 2005 (when it went up 70% over the next 15 months). Last time I checked, bull runs like this end with college dropouts throwing million-dollar champagne parties for dot-coms with no revenue, or your buddy across the street starting a mortgage company specializing in “pick-a-payment” loans and requiring no proof of income…not with the entire investing world betting against it.

That asset is gold, and like I said in “The Gold Bull – Something For Everyone”, I don’t care what your personal opinion of the shiny yellow stuff is, the only thing that matters at the end of the day is the number in your brokerage account. When Warren Buffett asked me in 2008 what investment I would recommend, I said “gold”, and he laughed like I knew he would. That’s OK, because I don’t care if I’m investing in gold, or lean hogs, or Beanie Babies, or the Los Angeles Dodgers, if there is a fundamental reason to buy an asset, price action is giving me a low-risk entry according to the TEMPOS system, and the majority of other investors are either blissfully unaware or positioned in the opposite direction, I’m going to buy.

I am not a gold bug, as many of you are probably labeling me right now, and I’m not everyone’s favorite bear or realist either (Doug Kass and John Hussman play their respective roles to perfection). But as I survey the investing landscape right now, I would be lying if I didn’t proclaim “I feel like I’m taking crazy pills!” (gratuitous Zoolander reference) with regards to commodities in general, and precious metals specifically at the moment. Unless you are limited to the specifics of a 401k plan, or forced to buy the products of a specific financial institution, there is no reason not to have at least some exposure to the “yieldless ones” going forward when the right entries are presented, with a specific amount of risk, such as now. It has taken many long months for commodities to finally be put on the back burner of the investing world, and now that they have joined Milton from Office Space in searching for their collective staplers, as Refined Investors our opportunity is nigh.

To have great wealth, you either have to start a great company, make great investments, be in the top percentile of your profession worldwide, or be born into it. For most of us, option #2 is the best shot we get, even though we all believe that we’re going to start the next Apple Computer or be the next American Idol winner. Taking our hard earned money and managing it in a contrarian, yet intelligent way (avoiding value traps and managing risk) is our lot in life, and we must excel at it because our families depend on us. Life is difficult, and social darwinism a brutal reality, but ultimately with patience and dedication to our craft we can make wise decisions and move ahead.

We don’t fight the crowd here at TRI, but we watch for when the smart money shifts directions and then we make our move while risk is the lowest. Right now, the crowd is in equities, but the smart money is accumulating elsewhere…and for Refined Investors, that presents a golden opportunity for making money, with a silver lining. We continue to hold our long positions in GLD and GDX based on TEMPOS mean-reversion entries. We will be looking for entries in silver, sugar, palladium, and natural gas next week.

Bonus Chart – Silver’s intermediate cycles have been following a curved path, and although I’m not one for predictions, it has been interesting to watch it unfold:


Good trading all.

Steve Chapman, TRI