ETF Periscope: Playing Around with some Commodity ETFs

Playing Around with some Commodity ETFs

by Daniel Sckolnik of ETF Periscope

“The importance of money flows from it being a link between the present and the future.”   -- John Maynard Keynes

Is it just me, or does it seem like the markets are holding their collective breath, nervously waiting for a shoe to drop?

The Dow Jones Industrial Average (DJIA) ended Friday at 11,872, up 0.7% for the week and continuing the solid uptrend it has been riding since December.  For January, the Dow is up almost 300 points so far, and market volume has been strong and steady. Yet there were numerous pundits shouting “Correction!” on Thursday, just because the Dow took an extended visit into the red zone for part of the day, even though it managed to recover and get back to even.  Are they on to something, or are they too quick on the trigger in an effort to call the inevitable correction that will occur at some point?

While the cliché “the trend is your friend” has certainly earned its bona fides—and it would be difficult to argue the markets have been on the upswing in recent months—there is a lot of evidence to indicate that the next dip may be deep, whether it is a quick hit or a slow descent.

In looking at the benchmark S&P 500 Index (SPX), which generally runs in step with the Dow, we see that on Wednesday it took the largest hit that it has in over two months.  It ended up testing its recent support level of 1,270 on Thursday before recovering by market close.  On the week, the SPX ended down 0.8%.  More significantly, the Nasdaq dropped 2.4% during the same period, impacted, no doubt, by Apple’s grandmaster retreating to the sidelines due to health concerns.

The week also saw some significant action in commodities, with gold, silver and oil all seeming to be reaching critical junctions.  USO, a widely traded oil ETF, found itself on the downside of its 50-day moving average.  It is now down over 4% since the beginning of the year.  If it finds itself below 37, which has served as pretty severe resistance in the past, USO might be stuck on the underside of that number for a while.

China’s attempts to cool down its economy, while not bearing much fruit up until now, might catch up with its recent insatiable demand for the stuff.  Prices will certainly be impacted if and when that occurs, in the long run.  In the short term, maybe it’s a buying opportunity if the speculators decide to dive back into the murk.

Gold?  What’s up with that?  The debate is on, as it has been for the last year, as to whether the pretty metal is due at long last for a serious correction, beyond the 3% descent over the course of the last six sessions.

Looking at it through the ETF lens of GLD, it is on the low side of the sideways trend that it has been vacillating in since October. The support level of 130 could be tested this week, and if that fails an additional 3.5% could occur, as the next support level appears at 125.  If this does happen, it would likely be in tandem with a general correction in the markets, as opposed to a sudden dump of gold by hedge funds and other speculators.

It will be interesting to see at what price gold will be considered a bargain. It might even be considered by some to be close to that point right now, if that includes some of the Asian and European sovereign funds that have bought the metal with gusto throughout 2010.  If so, then the metal may rebound strong and fast.

With earnings season now in the proverbial “full swing,” the direction of the markets could be revealed as soon as this week. The 12,000 level of the Dow may yet be tested in January, and then things could really get interesting.

Exhaling in a sigh of relief would be, well, a relief.  Just don’t hold your breath that another shoe won’t drop in the not too distant future. Hedging your portfolio right about now might put a damper in hoped- for profits, but the price for finding your comfort level is smart, if not priceless.

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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.

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daniel / Tag: DJIA, Dow Jones Industrial Average, GLD, SLV, SPX, USO /