Archive of ‘Weekend Report’ category

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

Weekly Report – March 2nd, 2013

To a passive investor, the Dow Jones Industrial Average is sitting at all-time highs and the future is bright. To a casual investor, the cyclical move out of the 2009 lows has been impressive but there are a few red flags starting to emerge. To a professional investor, there is an epic battle being waged that only occurs a handful of times every 15-20 years. What I mean by that statement is that we are on the cusp of a potential transition. This transition is not necessarily going to happen, but from a risk management perspective we have to have a plan for it…

The $SPX is trying to prove that it is transitioning from a cyclical bull market to a secular bull market, and by doing so it will dethrone gold as the current title holder of “asset class of choice”. Just like a boxer fighting his way to the top to get his chance at the world champion, so too are stocks trying to deliver that knockout punch to precious metals. Gold has remained the favorite for the last 12 rounds of this match of unknown length, but in the 13th round it is stumbling and disoriented, and so too are its fans. Sentiment has never been worse, never has it had 5 consecutive negative monthly closes in a row, and downside targets have never been lower. Will gold have its Rocky Balboa moment and come back to life with a miraculous burst of energy with greater glory in years to come? Or will it just be a barbarous relic liquidated regretfully at the local “We Buy Gold” store by those that have loved it for so many years?

At the moment, nobody knows that answer. Our job as Refined Investors is not to predict the future, but instead to own the asset classes with significant potential for appreciation and a practical plan for risk management. We want to own assets with a solid fundamental backdrop, in a secular bull market, at times when they are unloved and undervalued by other participants. The biggest positive of investing in a secular bull market is that surprises happen to the upside over the longer-term, and investing mistakes can be remedied. Every other investment is simply a chase of short-term money flows, and mistakes have very little chance for recovery once the hot money rotates somewhere else.

Therefore, as Refined Investors where should we be allocating our investment capital, and how should we protect it? We can’t buy an asset simply because it is unloved, oversold, and with momentum against it, because these “value traps” can occur for years. We either want to buy notable momentum crosses such as our 9 EMA/20 MA cross, cycle lows within momentum trends, or mean reversion opportunities when trends are taken too far. Randomly buying a low just because of a date, swing low, sentiment number, media story, chart pattern, or technical indicator, especially with momentum against us, is a surefire way to chop up our account.

First off, the market took price lower in GDX, and because of our risk management we were forced to remove the position from our portfolios. Even though every contrarian buy signal in the world is flashing brightly, we have to respect the price action. We will continue to monitor the miners going forward and be ready for an entry, especially on an additional breach of the MA Envelopes. With that being said, let’s survey the landscape and see if the market is presenting any opportunities for our capital:


March 2nd SPY Daily


March 2nd XIV Daily


March 2nd UUP Daily


March 2nd GLD Daily


March 2nd GDX Daily


March 2nd IBB Daily

We have been patiently waiting for the market to make its next move, specifically in SPY, UUP, and GLD/GDX. We will continue to watch SPY to see if new highs are made, GLD to see whether new lows are made, and UUP to see if it moves into a daily cyle low. However, IBB also has a tremendous chart setup with an ideal risk/reward entry, and a long position with a stop under Friday’s low is appropriate.

Focus on your risk management and continue the search for ideal entries with close stops and favorable momentum or mean-reversion characteristics. This late in a boxing match, it all comes down to preparation and mental fortitude. It will be exciting to see which market prevails. Enjoy your weekend.

Good trading all.

Steve Chapman, TRI