09
May
2011

ETF Periscope: Bears Snap Out of Snooze, Commodities Get Goosed

Bears Snap Out of Snooze, Commodities Get Goosed

by Daniel Sckolnik of ETF Periscope

“I made my money by selling too soon.” -- Bernard Baruch

The sound you may have heard last week was the stirring of the Bears.

The question might be asked, are they simply stirring, agitated by the noise of their own snores, or are they really ready to rise and lumber out of their hibernation caves?

To begin with, it’s hard to ignore the deafening clamor of shiny metals crashing sharply to lower price points, or the loud “whoosh” of oil riding the right side of the charts lower like rushing water down a sluice.

Gold ended the week at 1,492, down a substantial 4.6%, and that’s including Friday’s limited rebound. Gold lost about half of the gains it had made over the course of April, which was substantial.

Silver got smacked down even further, ending the week at 35.30, down almost 30% off its highs at one point during the week. It suffered a hard loss of its entire April gains, with half of March’s profits tossed in to boot. Oil somehow managed to do even worse, ending at under $98, costing almost the entire gains it had accrued since March of 2011.

Ouch. Ouch. And ouch.  

The major indexes faired relatively better, with the Dow Jones Industrial Average (DJIA) ending the week at 12,638, a loss of 1.5%. The S&P 500 Index (SPX) also got hammered, down 1.8% and ending the week at 1,340. The Dow remains safely, at least for now, above its 50-day moving average, with 12,500 likely to be the testing grounds for its next level of support. The S&P 500 may find additional support at its own 50-day MA before moving on and up. That MA, 1,320 as of Friday, might suffice to bolster a northern move.

Silver’s move is clearly the result of a confluence of events, some of them readily identifiable. The primary suspects included George Soros announcing that he had dumped a substantial portion of silver held in his hedge fund, which is precisely the sort of thing that sheep in speculator clothes would strongly react to.

The second, more significant event was the announcement by CME Group, which runs Comex, that the margin requirements for silver futures was increasing by 30%. The argument goes that this created a sudden margin call among a number of speculators, resulting in sell-offs of their futures positions.

A mad, forced exodus, as it were. It remains to be seen if the sell-off has run its course. Unlike gold, which rebounded and held its move up on Friday, silver moved up, found no sure footing, and ran right back down, though it still remained slightly higher for the day.

The reason for oil’s strident move down seems less clear.
Naturally, the main culprit could be commodity speculators, who had successfully run up the cost of oil futures, taking advantage of the chaotic economic-political shake up that has been occurring in the Middle East and Northern Africa. While $100 per barrel might have been an expected support level, off more than $15 from the recent highs, it will be interesting to see if that number serves instead as resistance.

Will the noise coming out of the White House about getting serious with its “anti-oil speculators” task force serve to spook the speculators away? Unlikely, though having Qatar's oil minister say he thought the fundamentals were fine, that he didn’t see any supply shortage, and that OPEC was unlikely to make any dramatic decisions during the upcoming meeting in June, is hardly a reason to send prices racing back up to the recent, higher levels.

The mood of the equity markets in particular can be caught, with some accuracy, by looking at the VIX (Chicago Board Options Exchange Market Volatility Index), which closed on Friday at 18.40 The VIX, commonly referred to as the “fear index,” is by its very nature hyper-responsive to the moods of the markets. When it is low, it means that implied volatility is down. When it goes up, it means volatility levels are up.

Last week, the VIX was at its four-year low. Friday found it over 20% higher. Still, it currently remains at historically low levels, and therefore remains attractive as an effective downside hedge. Because it affectively tracks market volatility, it serves as a natural hedge against downward moves in the markets in general, and frequently, in commodities in particular.

The thing is, the markets have been acting much more vulnerable over the last few weeks than they have during the majority of the recent Bull Run. In fact, with the obvious exception of the recent events in Japan, which shook the markets but then were, in turn, promptly shaken off, the markets have been climbing pretty steadily, with an almost Teflon-like ability to shrug off bad news that even the Gipper himself could have only admired. That just doesn’t seem to be happening as readily right now.

Whatever happens this week, it is likely that commodities will be more of a market follower than a market leader.

Still in the mood for playing commodities? Convinced that a bounce is on the way? Here is a list of ETFs that you can substitute for gold, silver and oil.

GLD (SPDR Gold Trust) tracks the Gold Bullion Index. It is designed to track the spot price of gold bullion.

SLV ( iShares Silver Trust) tracks the Silver Bullion Index. It is designed to track the spot price of silver bullion.

USO (United States Oil Fund) tracks the Light Sweet Crude Index, which follows price changes in price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange.

To play the VIX, you can substitute VXX, (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the VIX. It offers exposure to VIX futures contracts and reflects the implied volatility of the S&P 500 Index. It does not, however, move in strict concordance with the VIX, though it does make a reasonable effort.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

“I made my money by selling too soon.” -- Bernard Baruch

The sound you may have heard last week was the stirring of the Bears.

The question might be asked, are they simply stirring, agitated by the noise of their own snores, or are they really ready to rise and lumber out of their hibernation caves?

To begin with, it’s hard to ignore the deafening clamor of shiny metals crashing sharply to lower price points, or the loud “whoosh” of oil riding the right side of the charts lower like rushing water down a sluice. Gold ended the week at 1,492, down a substantial 4.6%, and that’s including Friday’s limited rebound. Gold lost about half of the gains it had made over the course of April, which was substantial.

Silver got smacked down even further, ending the week at 35.30, down almost 30% off its highs at one point during the week. It suffered a hard loss of its entire April gains, with half of March’s profits tossed in to boot. Oil somehow managed to do even worse, ending at under $98, costing almost the entire gains it had accrued since March of 2011.

Ouch. Ouch. And ouch.

The major indexes faired relatively better, with the Dow Jones Industrial Average (DJIA) ending the week at 12,638, a loss of 1.5%. The S&P 500 Index (SPX) also got hammered, down 1.8% and ending the week at 1,340. The Dow remains safely, at least for now, above its 50-day moving average, with 12,500 likely to be the testing grounds for its next level of support. The S&P 500 may find additional support at its own 50-day MA before moving on and up. That MA, 1,320 as of Friday, might suffice to bolster a northern move.

Silver’s move is clearly the result of a confluence of events, some of them readily identifiable. The primary suspects included George Soros announcing that he had dumped a substantial portion of silver held in his hedge fund, which is precisely the sort of thing that sheep in speculator clothes would strongly react to.

The second, more significant event was the announcement by CME Group, which runs Comex, that the margin requirements for silver futures was increasing by 30%. The argument goes that this created a sudden margin call among a number of speculators, resulting in sell-offs of their futures positions.

A mad, forced exodus, as it were. It remains to be seen if the sell-off has run its course. Unlike gold, which rebounded and held its move up on Friday, silver moved up, found no sure footing, and ran right back down, though it still remained slightly higher for the day.

The reason for oil’s strident move down seems less clear. Naturally, the main culprit could be commodity speculators, who had successfully run up the cost of oil futures, taking advantage of the chaotic economic-political shake up that has been occurring in the Middle East and Northern Africa. While $100 per barrel might have been an expected support level, off more than $15 from the recent highs, it will be interesting to see if that number serves instead as resistance.

Will the noise coming out of the White House about getting serious with its “anti-oil speculators” task force serve to spook the speculators away? Unlikely, though having Qatar's oil minister say he thought the fundamentals were fine, that he didn’t see any supply shortage, and that OPEC was unlikely to make any dramatic decisions during the upcoming meeting in June, is hardly a reason to send prices racing back up to the recent, higher levels.

The mood of the equity markets in particular can be caught, with some accuracy, by looking at the VIX (Chicago Board Options Exchange Market Volatility Index), which closed on Friday at 18.40 The VIX, commonly referred to as the “fear index,” is by its very nature hyper-responsive to the moods of the markets. When it is low, it means that implied volatility is down. When it goes up, it means volatility levels are up.

Last week, the VIX was at its four-year low. Friday found it over 20% higher. Still, it currently remains at historically low levels, and therefore remains attractive as an effective downside hedge. Because it affectively tracks market volatility, it serves as a natural hedge against downward moves in the markets in general, and frequently, in commodities in particular.

The thing is, the markets have been acting much more vulnerable over the last few weeks than they have during the majority of the recent Bull Run. In fact, with the obvious exception of the recent events in Japan, which shook the markets but then were, in turn, promptly shaken off, the markets have been climbing pretty steadily, with an almost Teflon-like ability to shrug off bad news that even the Gipper himself could have only admired. That just doesn’t seem to be happening as readily right now.

Whatever happens this week, it is likely that commodities will be more of a market follower than a market leader.

Still in the mood for playing commodities? Convinced that a bounce is on the way? Here is a list of ETFs that you can substitute for gold, silver and oil.

GLD (SPDR Gold Trust) tracks the Gold Bullion Index. It is designed to track the spot price of gold bullion.

SLV ( iShares Silver Trust) tracks the Silver Bullion Index. It is designed to track the spot price of silver bullion.

USO (United States Oil Fund) tracks the Light Sweet Crude Index, which follows price changes in price of the futures contract on light, sweet crude oil traded on the New York Mercantile Exchange.

To play the VIX, you can substitute VXX, (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the VIX. It offers exposure to VIX futures contracts and reflects the implied volatility of the S&P 500 Index. It does not, however, move in strict concordance with the VIX, though it does make a reasonable effort.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

ETF Periscope