ETF Strategy: Fed Creates Uncertainty For GLD; XBI Bounces Back Sharply, But Fundamentals Still Weak; Bullish On XLE And USO

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Summary

Sentiment on GLD turns cautious.

The bullish case for USO strengthens.

XBI could see a pullback.

This week, the focus was once again the Federal Reserve. The minutes from the Fed's most recent FOMC took the market by surprise last week. The minutes showed that the Fed could hike interest rates in June itself. Since then several Fed officials have given hawkish statements. The Fed's hawkish tone also changes investment strategy.

Uncertainty for Gold

Gold has been the biggest beneficiary of a dovish Fed. The ten-year price chart below shows how the precious metal rallied during the Fed's quantitative easing days.

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Goldprice.org

By the time the Fed introduced a third round of bond purchases, gold hit an all-time high level, crossing $1,900 an ounce. Prices began to see a pullback as the Fed began winding down its bond purchases in 2014. As speculation began over when the Fed will hike interest rates, gold was virtually written off as an asset.

The precious metal though has made a strong comeback this year. The initial gains were driven by demand for safe-haven assets. But as the year progressed, the market began speculating that the Fed will not hike interest rates more than once this year. A rate hike, if it comes, would come towards the end of the year. A dovish Fed was seen as a positive for gold. All that changed last week.

The SPDR Gold Trust ETF (NYSEARCA:GLD) is still up almost 15% for the year. However, the fund has seen a sharp pullback since last week.

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Google Finance

In an article earlier this week, I had noted that it is time to take profit on the Market Vectors Gold Miners ETF (NYSEARCA:GDX). As gold rallied this year, GDX has posted substantial gains. But with the outlook for gold prices uncertain in the wake of a hawkish Fed, I believe it is time to take the gold bets off the table.

Bullish Case for USO Strengthens

While I have turned cautious on GLD and GDX, the bullish case for United States Oil Fund ETF (NYSEARCA:USO) strengthened further this week. USO is already up more than 35% in the last three months as oil prices have rebounded. Oil prices have rebounded on supply outages. But fundamentals are also improving. There was further evidence of this earlier in the week.

Data released by the Energy Information Administration (EIA) and the American Petroleum Institute (API) showed that inventories dropped sharply last week. The EIA data showed that U.S. crude oil inventory fell by 4.2 million barrels. API had reported on Tuesday that inventories dropped 5.1 million barrels.

Both sets of data highlight the fact that crude oil production in the U.S. is declining. This should support prices further.

In the last three months, the SPDR Energy Select ETF (NYSEARCA:XLE) has gained almost 18%.

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Google Finance

With the outlook for oil continuing to improve, XLE could be an interesting bet. Energy stocks are still languishing at multi-year low levels. The one-year price chart for XLE shows that even if the fund recovers to the levels it was trading at around this time last year, there could be at least 15% upside from current levels. Given the sentiment on oil right now, it looks XLE could offer some decent returns in the near term.

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Google Finance

Biotech Bounce Back

The biotech sector has made a strong comeback. At the time of writing this article, the SPDR S&P Biotech ETF (NYSEARCA:XBI) was down more than 1%. Despite the pullback, XBI is up more than 11% in the last five trading sessions.

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Google Finance

The question is whether the fundamentals of the biotech sector have improved. I believe the gains were more due to some bargain hunting. Fundamentals for the biotech sector still remain weak. One of the major concerns I have is access to capital markets. We once again saw a biotech withdrawing its IPO. Viamet Pharmaceuticals withdrew its IPO last Thursday. Meanwhile, Reata Pharma priced its IPO well below its original range.

I expect another pullback in the biotech sector on some profit booking after the recent rally. The Direxion Daily S&P Biotech Bear 3X Shares (NYSEARCA:LABD) could be a good way to play the biotech pullback. At the time of writing this article, LABD was up more than 3%. LABD saw a series of lower lows over the past week as the chart below shows. But the ETF has bounced back after finding support at around $35. Technicals suggest further gains.

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Stockcharts.com

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.