08
Nov
2010

ETF Periscope: Biting the Silver Bullet, or Maybe Hopping on for a Ride?

Biting the Silver Bullet, or Maybe Hopping on for a Ride?

by Daniel Sckolnik of ETF Periscope

“I must have a prodigious quantity of mind; it takes me as much as a week sometimes to make it up.” ~ Mark Twain

The markets seemed to have taken a decision this week, though in a somewhat strange fashion.

The decision was to push firmly past the earlier highs of the year, though not necessarily on the expected day. The likely inevitable sea-change that occurred in Tuesday’s election results seemed to have been factored in by the markets, as Wednesday brought a bit of an uptick, but not a whole lot more than that. Then, on Thursday, as if investors suddenly woke up with a collective recognition that maybe the political tide had turned sharply in the favor of Wall Street, the Bulls came out to play in force and fired up both the Dow and the S&P 500 to highs for 2010. No doubt Bennie and the Feds contributed mightily to the upward effort as well, their plan of buying $600 billion in bonds to jack up the flailing economy embraced wholeheartedly by the equity markets.

New highs in the major indices? Hello! Time to break out the plan of action that all investors have when such events occur. What’s that? You don’t have such a plan? Hmm. Might not be a bad time to get one. But we’re ahead of ourselves. First, let’s take a look at last week’s action to get a clearer read on what next week might bring.  

As mentioned, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) topped 2010’s highs during the week, hitting upon levels not seen since the pre-Lehman Brothers days back in ’08. The Dow ended Friday at 11,444, up almost 3% on the week, while the SPX landed at 1,225. The Nasdaq Composite Index (NSDAQ) was at 2578, up about 2% for the same time period. Crude oil finished at over $86 a barrel, and gold continued its nosebleed ascent to record heights, with gold futures coming teasingly close to the $1,400 level.

The main noise from the economic reports, beside the Fed’s announcement, included mixed messages from the Department of Labor. The government reported that unemployment rates continue to hold at troubling levels, specifically 9.6%, though over 150,000 jobs were added during the month of September. As for the upcoming week? We’ll be treated to new data including wholesale inventory reports, crude inventory reports and the ever-insightful University of Michigan/ Reuters Sentiment report.

Before we move on to some thoughts on specific ETFs to consider for fun and profit, it seems worth recounting a particularly memorable line given by Ben Bernanke on Saturday, apparently pooh-poohing the idea that his actions might actually cause higher inflation: "We’re not in the business of trying to create inflation. Our purpose is to provide additional stimulus to help the economy recover… but our credibility must be maintained.”

Good to know, Ben. However, not everyone appears to be convinced. Several of the so-called “peripheral markets” of Europe were down sharply on Friday, including those of Dublin, down 1.3% on the day, and Portugal, down 1.5%. The larger equity market in London was up slightly, though the financial sector took a drubbing. All this is mentioned in regard to the fact that this type of reaction might emerge from concerns of possible restructuring of European Union member countries’ sovereign debt, which would be severely impacted by a strong rise in inflation in the U.S.

Now, to some ETF ideas worth considering. Let’s talk about silver.

Since this is an ETF-themed commentary, I’ll use SLV (iShares Silver Trust ETF) as a proxy for silver. This ETF, which tracks silver bullion’s spot price, has soared over 44% since August. Year-to-date, the ETF has risen a mind-boggling 58%. In comparison, high-flying gold has received much more press but can’t compare to silver’s performance. For a proxy, let’s use GLD (SPDR Gold Trust ETF), which tracks the spot price of gold bullion. It’s up 27% year-to-date, and has risen about 18% since August.

Aside from the fact that SLV has outperformed GLD, what other factors are worth looking at in considering adding silver to your portfolio? A key piece of information is the fact that at a hearing last month, the commissioner of the Commodity and Futures Trading Commission said there have been “fraudulent efforts to persuade and deviously control” silver prices and that violators should be prosecuted. The probe, focused on silver futures, has been going on since 2008, but seems to be heating up and gaining greater public awareness. And since that yoke of manipulation has arguably been lifted, there may be even more room for silver to rise, on its way to finding its true market value.

Technically speaking, there are no apparent reasons that SLV should stop climbing. The current price is well above both the 50-day and 200-day moving averages, and, like gold, as the precious metal is hitting new highs, there are no obvious resistance levels that stand out. Well, there is that pesky law of gravity. And though a lot more sparkly, silver, like Newton’s apple, must surely come down at some point. The question, naturally, is when. And though silver hardly holds the same historical record of serving as a hedge against inflation, it may be reaching a point where it may mirror some of gold’s tendencies in that regard.

So, is a sliver or more of silver a good fit for your portfolio? Maybe. The downside might be an inevitable short-term correction, but the long-term prognosis makes it a bullet that could be worth adding to your arsenal. Whether it proves to be a magic bullet, time, as always, will be the final arbitrator of that particular vote.

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 must have a prodigious quantity of mind; it takes me as much as a week sometimes to make it up. ~ Mark Twain

The markets seemed to have taken a decision this week, though in a somewhat strange fashion.

The decision was to push firmly past the earlier highs of the year, though not necessarily on the expected day. The likely inevitable sea-change that occurred in Tuesday’s election results seemed to have been factored in by the markets, as Wednesday brought a bit of an uptick, but not a whole lot more than that. Then, on Thursday, as if investors suddenly woke up with a collective recognition that maybe the political tide had turned sharply in the favor of Wall Street, the Bulls came out to play in force and fired up both the Dow and the S&P 500 to highs for 2010. No doubt Bennie and the Feds contributed mightily to the upward effort as well, their plan of buying $600 billion in bonds to jack up the flailing economy embraced wholeheartedly by the equity markets.

New highs in the major indices? Hello! Time to break out the plan of action that all investors have when such events occur. What’s that? You don’t have such a plan? Hmm. Might not be a bad time to get one. But we’re ahead of ourselves. First, let’s take a look at last week’s action to get a clearer read on what next week might bring.

As mentioned, both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) topped 2010’s highs during the week, hitting upon levels not seen since the pre-Lehman Brothers days back in ’08. The Dow ended Friday at 11,444, up almost 3% on the week, while the SPX landed at 1,225. The Nasdaq Composite Index (NSDAQ) was at 2578, up about 2% for the same time period. Crude oil finished at over $86 a barrel, and gold continued its nosebleed ascent to record heights, with gold futures coming teasingly close to the $1,400 level.

The main noise from the economic reports, beside the Fed’s announcement, included mixed messages from the Department of Labor. The government reported that unemployment rates continue to hold at troubling levels, specifically 9.6%, though over 150,000 jobs were added during the month of September. As for the upcoming week? We’ll be treated to new data including wholesale inventory reports, crude inventory reports and the ever-insightful University of Michigan/ Reuters Sentiment report.

Before we move on to some thoughts on specific ETFs to consider for fun and profit, it seems worth recounting a particularly memorable line given by Ben Bernanke on Saturday, apparently pooh-poohing the idea that his actions might actually cause higher inflation: "We’re not in the business of trying to create inflation. Our purpose is to provide additional stimulus to help the economy recover… but our credibility must be maintained.”

Good to know, Ben. However, not everyone appears to be convinced. Several of the so-called “peripheral markets” of Europe were down sharply on Friday, including those of Dublin, down 1.3% on the day, and Portugal, down 1.5%. The larger equity market in London was up slightly, though the financial sector took a drubbing. All this is mentioned in regard to the fact that this type of reaction might emerge from concerns of possible restructuring of European Union member countries’ sovereign debt, which would be severely impacted by a strong rise in inflation in the U.S.

Now, to some ETF ideas worth considering. Let’s talk about silver.

Since this is an ETF-themed commentary, I’ll use SLV (iShares Silver Trust ETF) as a proxy for silver. This ETF, which tracks silver bullion’s spot price, has soared over 44% since August. Year-to-date, the ETF has risen a mind-boggling 58%. In comparison, high-flying gold has received much more press but can’t compare to silver’s performance. For a proxy, let’s use GLD (SPDR Gold Trust ETF), which tracks the spot price of gold bullion. It’s up 27% year-to-date, and has risen about 18% since August.

Aside from the fact that SLV has outperformed GLD, what other factors are worth looking at in considering adding silver to your portfolio? A key piece of information is the fact that at a hearing last month, the commissioner of the Commodity and Futures Trading Commission said there have been “fraudulent efforts to persuade and deviously control” silver prices and that violators should be prosecuted. The probe, focused on silver futures, has been going on since 2008, but seems to be heating up and gaining greater public awareness. And since that yoke of manipulation has arguably been lifted, there may be even more room for silver to rise, on its way to finding its true market value.

Technically speaking, there are no apparent reasons that SLV should stop climbing. The current price is well above both the 50-day and 200-day moving averages, and, like gold, as the precious metal is hitting new highs, there are no obvious resistance levels that stand out. Well, there is that pesky law of gravity. And though a lot more sparkly, silver, like Newton’s apple, must surely come down at some point. The question, naturally, is when. And though silver hardly holds the same historical record of serving as a hedge against inflation, it may be reaching a point where it may mirror some of gold’s tendencies in that regard.

So, is a sliver or more of silver a good fit for your portfolio? Maybe. The downside might be an inevitable short-term correction, but the long-term prognosis makes it a bullet that could be worth adding to your arsenal. Whether it proves to be a magic bullet, time, as always, will be the final arbitrator of that particular vote.

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
daniel / Tag: DJIA, Dow Jones Industrial Average, GLD, NASDAQ, S&P 500 Index, SLV, SPX /