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Market related software development. http://getmarkettrend.wix.com/stock-market-trend
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Micrologic
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  • The Current State Of The Market 0 comments
    Jan 28, 2014 2:05 PM | about stocks: SLV, ETF

    As we all know, the 2013 year market's performance was quite exceptional, and as any exceptional event it should not be expected to repeat itself for 2014 and, at least, for a couple of years that are ahead of us . The strong market performance for several previous years was driven by a combination of several favorable factors:

    - Recovery from the oversold market after the 2008 -2009 correction

    - Exceptionally low interest rates

    - Gradual economic recovery

    Looking forward we cannot expect these conditions to continue

    - We are very far from the depressed market prices; just the opposite, we should deal with the
    overextended market

    - Interest rates are expected to start rising

    - Economic recovery (although widely expected) is slow and the current earning season is far
    from being spectacular so far

    Under such conditions, a bumpy ride with an increased volatility should be expected ahead. The overextended prices (if they not substantially reduced by a strong corporate earnings) make the market vulnerable to any negative news and will inevitably end up with a substantial pullback or even a crash. And if the current pullback turns out to be shallow then the more market advances in the future the more severe correction should eventually be expected.

    Based on the above, it is only logical to reexamine the current investment strategy and consider a more defensive and conservative approach. There are several suggestions (already briefly mentioned in our email) that make sense to reiterate in a much broader context of the almost 5 years old bull market, rising interest rates, and even a possibility of inflation.

    1. Consider switching from SPY as our relatively conservative preferred investment vehicle to even more conservative ETF called CWB - Barclays convertible securities. Here are the reasons:

    a) CWB pays quite good dividends (currently 3.60%) while SPY pays 1.90%

    b) CWB pays dividends monthly while SPY and the majority of ETFs pay them quarterly

    c) Paying such generous dividends makes this ETF more stable and less volatile (dividends provide you with a steady income and compensate for some unexpected market moves (when they happen)

    d) There are other ETFs paying monthly dividends, but they mostly use bonds and their performance if really disappointed (most of them are actually in a declining trend). In contrast, CWB (although trailing SPY) uses convertible stocks and it is in a consistent uptrend and actually currently behaves stronger than SPY due the already mentioned conditions and the market shifting to a more conservative behavior. Here are two charts (one year and six months) that compare CWB and SPY performance:

    e) Our software recently triggered the "sell" signal for CWB so the buying opportunity is in front of us.

    (click to enlarge)

    2. Consider Silver ETF (NYSEARCA:SLV) for the following reasons:

    a) In contrast with the currently overextended market, silver was in a very strong down trend all these years. The chart below shows that by now it already lost over 60% of its value and its price is back where it was in 2010 (when it started its strong uptrend). So, we are looking at
    the situation with silver that reminds the situation with SPY in 2009 - getting close to finding support and starting the uptrend.

    b) Silver is widely used in manufacturing, which is a plus for a gradually recovering economy.

    c) Rising interest rates and expected inflationary environment is good for silver.

    d) SLV is still in a downtrend, but is seems to already finding support and to starting the long new uptrend

    (click to enlarge)

    3. If the "sell" signal is triggered, consider allocating some portion of your investment to some inverse ETFs (when a corresponding "buy" signal is issued. For those who is unfamiliar with this concept, inverse ETFs move in the direction that is opposite to the market in general, and to the security (NYSEMKT:ETF) it inverses in particular. For example, the inverse "SH" ETF (Short S&P 500) moves in the opposite direction of the "SPY" ETF. In the overextended market that is expected to change its trend, it make sense allocating 10 - 20 present of your total investment to such inverse ETFs.

    The reason - SH ETF was in a long down trend till now, losing its value in a very strong almost five year long bull market. It is in a similar situation as silver and is due to finding support and starting the new uptrend.

    Here are two charts (5 year and 1 year charts) that compare SH vs. SPY

    Finally, this is the SH chart with the signals. As mentioned, it is still in a down trend but is getting close to the trend change

    (click to enlarge)

    Disclosure: I 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.

    Themes: market-outlook Stocks: SLV, ETF
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