ETF Pullback Choices: Living Dangerously With Silver and Oil

Includes: DBS, PXE, PXJ, SIVR, SLV
by: Marc Gerstein

This week's listing for the my ETF Pullback strategy (see Appendix below for details and performance information) probably constitutes as good a reminder as we're likely to see of an important element of technical analysis: buying when analysis clearly dictates otherwise because of an expectation that market dynamics will, at least for a short time (one week in the case of this strategy), produce a counter-analytic outcome. Here's this week's list:

  • 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)

This was the list for last week:

  • Brazil Infrastructure Index (NYSEARCA:BRXX)
  • GREENHAVEN Continuous Commodity (NYSEARCA:GCC)
  • iShares MSCI Thailand (NYSEARCA:THD)
  • PowerShares DB Agriculture (NYSEARCA:DBA)
  • SPDR Barclays Capital TIPS (NYSEARCA:IPE)

Generally speaking, as I've written on various occasions here, I like oil and silver. Oil is a vital commodity for which demand is likely to outstrip supply as economies worldwide advance. The ability of rising oil prices to help investors cope with inflation is another plus. Silver likewise benefits from improved economic activity and also serves as a hedge against inflation or any other progress. But silver, like gold, is also good as a general-purpose investment in fear, something that's definitely rampant and rising.

But whatever one may think of any asset, prices can never be expected to move infinitely upward or downward. Chart-observers see lots of zigs and zags which may or may not get fancy names depending on whether they form recognizable patterns. Often, they look random. But they aren't. Price trends are easy to analyze after the fact, but it's always hard to predict what the next move will be. Hence rallies can be expected to be periodically punctuated by bouts of selling (profit taking) and downtrends will periodically be punctuated by purchasing as some assume prices have come down far enough.

Oil and silver have both been experiencing corrections lately.

With silver, it may simply be a matter of the price having run too far too fast making it way too hard for holders to resist cashing in positions. Increasing margin requirements on silver holdings is another factor.

Some of too-far-too-fast phenomenon has likely been happening with oil, too, but here, we also need to factor in geopolitical sentiment, which has been on a roller coaster since the Mideast political uprisings began. The latest event, the death of Bin Laden, may suggest to some that things will become more stable, although that's a sentiment that may last only until the next major media sound bite. There's also the question of how high oil can go near term without dampening the economic activity that is so important to the ultimate bullish case.

This particular pullback strategy assumes corrections also have their own zigs and zags. This week's list will work well if a reasonable number of traders jump in assuming the steep corrections we've seen (especially in silver) have run their course. The model doesn't assume, one way or the other, whether such sentiments are accurate. It only assumes they'll be present in the coming week.


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 5 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 percent 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 do 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.

Figure 1

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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

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

(Click to enlarge)

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.

Disclosure: I am long SIVR, SLV, DBS, PXE, PXJ.