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Last week’s listing for the ETF Pullback strategy (see appendix below for details and performance information) was a pretty bold example of pure technical analysis: buying when subjective analysis clearly dictates otherwise based on an expectation that market dynamics will, at least for a short time (one week in the case of this strategy), produce a counter-intuitive result. Here’s last week’s list, which focused on oil and silver:

  • ETFS Silver Trust (NYSEARCA:SIVR)
  • iShares Silver Trust (NYSEARCA:SLV)
  • PowerShares DB Silver Fund (NYSEARCA:DBS)
  • PowerShares Dynamic Energy Explor. & Prod.(NYSEARCA:PXE)
  • PowerShares Dynamic Oil & Gas Services (NYSEARCA:PXJ)

It was a brutal five-day period, incredibly volatile with an ugly ending. If you’ve been paying attention to commodity markets, you know that’s a world-class understatement. If you want to see the visuals, you can check the performance chart Figure 3 in the appendix below.

Interestingly though, this week’s list continued the theme but pushed the allocation more toward silver and general commodities. Here are the current ETFs:

  • ETFS Silver Trust (SIVR)
  • GREENHAVEN Continuous Commodity (NYSEARCA:GCC)
  • iShares Silver Trust (SLV)
  • PowerShares DB Silver Fund (DBS)
  • United States Gasoline Fund (NYSEARCA:UGA)

Obviously, this latter list is a tough one to swallow considering all the rhetoric about the bursting of a silver bubble. There is, however, an easy-to-grasp technical-analysis case, as discussed last week. No trend, even the inflating and bursting of bubbles, proceeds in a straight-line manner, making for opportunities to catch interim counter-trend moves. This weekly model, which looks for recent moves in opposition to well-established bullish trends, pursues this theme. The strategy will work if, more often than not, these counter moves are just that, temporary counter movements in the context of a still-valid trend. The model will falter if we’re experiencing a bona fide trend reversal.

The long-term performance data (see appendix) suggests that more often than not, we have, indeed, experienced mini-corrections rather than reversals. This is consistent with common-sense observation. Major reversals occur, but not as a matter of routine.

So what, exactly, are we expecting for silver, which accounts for 60% of this week’s list as pure play, and a bit more through the Greenhaven commodity fund?

Long term, I think the fear aspect of the investment case for precious metals in general, including silver, is not going to wither. Let’s face it: The world is not getting calmer nor is society getting less neurotic. But that didn’t help me last week and I don’t know that it can help me in the week ahead either.

So let’s switch gears a bit and look at the Commitment of Traders data on file with the Commodity Futures Trading Commission.

Click to enlarge

Table 1

What’s interesting, here, is the fact that the table is not really all that interesting. We see that commercial traders have become a bit less short lately and that investment traders have been buying in lately, but not at an earth-shattering pace.

In a late-March Seeking Alpha article, Ananthan Thangavel examines that same data and argues that much of the recent price action has been driven by ETFs and “mom-and-pop” silver fans and that this is not necessarily as worrisome as it might seem at first glance (especially to those who remember past occasions when mom-and-pop plunges in at major price peaks). Thangavel points out that silver has substantial industrial use, so a reduction in supply due to hoarding exerts upward pressure on prices, and that since physical silver holdings don’t involve futures-like margin, mom-and-pop can really afford to hand on. (Thangavel’s article is quite good. If you’re interested in silver, you really should take a look at it if you haven’t already done so.)

Is Thangavel’s analysis on target? I don’t know. But table 1 does serve to knock out an alternative analysis, the one that would blame hedge funds and the like (as many like to do when commodity prices get jumpy). Actually, it doesn’t look like we’re likely to experience much selling pressure form big-time market participants (to the contrary, it looks like they’ve been increasing their exposures). So it looks like the question of whether silver has been correcting or experiencing a bursting bubble depends on mom and pop and whether they’re likely to abandon the metal.

Some small investors will undoubtedly be scared off by the latest price action. But as I discussed in my prior article on fear, this emotion is intensifying, not diminishing. Imagine what will happen if we get a QE3, or even a rumor to that effect. And it’s not exactly as if the Middle East is calming down.

Stay tuned. The model may or may not fare well in terms of performance in the week ahead, but the risk of boredom is - essentially - zero.


To create this model, I started with a very broad-based ETF screen I created in

  • Eliminate ETFs for which volume averaged less than 10,000 shares over the past five trading days
  • Eliminate HOLDRs (I don't want to be bothered with the need to trade in multiples of 100 shares)
  • Eliminate leveraged and short ETFs (I think of these as hedging tools rather than standard ETF investments of even trading vehicles)

Then I sorted the results and select the top five ETFs based on the StockScreen123 ETF Rotation - Basic ranking system, which is based on the following factors:

  • 120-day share price percent change - higher is better (15%)
  • 1-Year Sharpe Ratio - higher is better (15%)
  • 5-day share price percent change - lower is better (70%)

The idea of using weakness as a bullish indicator is certainly not new. But often, it's an add-on to other factors that, on the whole, emphasize strength. Here, the weakness factor is dominant, with a 70% weighting.

This model is designed to be re-run every week with the list being refreshed accordingly. I trade through, where I pay a flat annual fee rather than a per-trade commission, so I don't care about the fact that turnover form week to week is often 80%-100%. If you want to follow an approach like this but have to worry about commissions, the strategy tests reasonably well with three ETFs, or even with one. (Cutting the number of ETFs is far preferable to extending the holding period.)

Figure 1 shows the result of a StockScreen123 backtest of the strategy from 3/31/01 through 12/30/10.

Click to enlarge charts

Figure 1

Figure 2 covers the past five years, a very challenging market environment that witnessed the fizzling of many strategies that had succeeded for a long time.

Figure 2

Figure 3, a screen shot from the account I use to trade the strategy.

Clearly, the model has been cold for much of the past six months as trends have come and gone with unusual rapidity. Volatility, noteworthy for being low early on, has really picked up of late. Frankly, though, all strategies have hot and cold periods, and if more-or-less matching a strong S&P 500 is what comes from a cold spell, I’ll take it. As for the last week: Oy! I hope I don’t see too many more of those! As noted, I don’t mind cold spells, but I hope the volatility it has been experiencing of late is an aberration.

Disclosure: I am long SIVR, GCC, SLV, DBS, UGA.