DBA Begins To Launch Mike Swanson (06/05/2016) The chart above is of course the DBA ETF. I have a 20% position in DBA in the model ETF rebalancing portfolio and also as a core position of similar size in my personal accounts. I have been banging the drum on it now for weeks saying that it was completing a stage one base to begin a brand new bull market. On Friday DBA had a strong day to close above its upper 200-day Bollinger Band and its March and May highs. It has completed its stage one base and is now in full blown launch mode. I have had critics who say DBA is not a good buy, because it might only go to 30 by the end of the year or that it won t go up as much as gold. But there is nothing wrong with a 50% gain or a 100% gain over 12 months. I also own DBA as a nice low vola- So many small fries got shaken out by the recent gold drop. STAGE ANALYSIS OF KEY MARKETS S&P 500 Long-term: Stage Four Bear Market Short-term: Drifting Summer Top Let People Buy At High Prices They Love to Buy At Gold Long-term: Stage Two Bull Market Begins Short-term: Gold stocks pausing finally or are they? Gold is, but stocks rally again. DBA ETF Long-term: Stage Two Begins Short-term: DBA now in launch mode.
tile safe core position. Most people would use a bond position for a safe portfolio position. But bonds do not have the upside DBA has. The TLT Treasury bond ETF could make a new high this year in reaction to a market dump, but that would not lead to the type of gains you can see in something like DBA that is starting a brand new bull market. Of course many of the soft commodities in DBA went up big last week too. Coffee, which I have a position in with the JO ETF, jumped up 3.76% on Friday and is still in its stage one base. So if you fear you missed out on DBA and want to be a part of this trend as a trade JO is one way you could do it. It could be bought with a stop loss placed below its recent low of $18.00 Of course I also have GDX, CEF and short ETF s SDS and DXD in the model rebalancing portfolio. Gold stocks and the GDX gold stock ETF all soared on Friday. People have been calling for gold crashes to come. Friday s move in gold stocks makes that call into a joke. In fact commercial traders closed out 23,576 contracts in the week ending last Tuesday and went long 12,581 in the gold futures market. As they did this though the small fry small traders tried to short 3,689 new contracts as they sold 5,376 of their long positions. So many small fries got shaken out by the recent gold drop and scared by the gold crash predictions while some of the more maniac traders tried to short gold. The triple gold short ETF DUST did a record 48 million shares in trading volume Friday as many DUST traders trying to buy on the base got destroyed. It s heading for another reverse split. This is why you do not short gold and why you do not sell out of core gold positions in the first year of its bull market. 2
3 Now some mining stocks such as NEM are now in a position that they are likely to make a new 52- week high. ABX and AU have similar charts to NEM. Others such as KGC are still off their highs and are not likely to make a new high in the next few days if the NEM and the others do. I still think though that gold itself is likely to trade in a seasonal range for the next few weeks. It is impossible to predict it exactly but if it matches the seasonal pattern gold won t make a run to new highs until the end of July or first half of August. However, even if gold goes sideways like that the gold stocks are likely to outperform gold. That means some mining stocks can just keep going up now no matter what gold does while others are likely to go sideways. I do think that overall GDX and the mining stock sector is likely to make a short-term peak this week and then come back down and then continue to base. That is what happened in March. But this is a bull market and the surprises now will be to the upside and this is why I simply hold my core positions and do not try to outsmart the bull market by trying to jump in and out. I actually got an email Friday morning from a someone on my free email list bragging to me that he sold his gold positions last week. Neither he nor I had any idea that GDX would go up 11% before the day would be over. He was telling me he listened to some guy who claims that gold is going to go to $1,000 on the basis that he has a secret computer program that tells him that and for which he will not share with anyone or tell how it works. Instead of riding the bull market this email guy is now in a bad spot. This is why you need to hold a core position in gold stocks. If you want to trade in and out do it around a core position and make the core position small enough that you won t be scared by a 15-20% dip that will happen a few times a year and crazy gold crash predictions.
4 One thing the gold bears are missing is the obvious and that is the huge outperformance in the mining stocks and the metal this year. This is key, because in gold bull markets the stocks tend to outperform and lead the action in both. Gold right now is still off of its highs while GDX is now right underneath its high. I do not understand why so many are ignoring the strength in the miners. I guess they just do not understand its importance. Last week I devoted my issue to seasonal gold trends and said that a pause was likely based on the fact that gold pulled back and the seasonal pattern does tend to repeat. I don t want to repeat all that info again so you can find it in last week s issue: http://wallstreetwindow.com/reports/wswreport05302016.pdf The key is that if the seasonal gold pattern repeats then gold will go sideways up and down in a range and then begin a big launch sometime between the last week of July and middle of August. This scenario for gold prices still seems likely, but the mining stocks will lead gold higher and go up first. I also think the stock market is likely to dump for good after the last week of July and that is what I really want to talk about today.
5 On Thursday and Friday I got so many emails from people on my free email list saying that the stock market was going to blast-off or wondering if it is now a bull market from a contrarian standpoint alone it made me wonder if the top might be in. Hi Mike This is one email: I have been following your emails for many years now. I have a Q. You were saying in Jan/ Feb /Mar that we are in a bear market. I also agreed looking at the chart. You continued to say that there would be a major fall in the stock market and the small uptrends were short lived. How come the fall did not come? In fact the market kept going higher and higher. Are we in a bull market now? Appreciate your answer. Thanks. My thoughts are that DBA breaking out this week is what the start of a real bull market looks like. Commodities go through a cycle in which gold and silver begin new bull markets first and then soft commodities follow. Bull markets in gold, mining stocks, and commodities lead to tremendous gains and I am simply happy to be able to have my money in them than to sit there with money in the US stock market hoping it will breakout and go up another 2-3%. Why risk money for little gains when you can
6 invest at the start of a bull market? CNBC doesn t tell you that and I know everyone watches it non-stop so that is why all they think about is the daily US stock market price action. I believe the stock market is trading just like it did last summer and perhaps even like it did in November and December before the January drop, but I need to see a few weeks of action to see what the internals of the market do and individual stocks to be sure of the latter. Of course the Nasdaq is already performing worse than the S&P 500 and DOW are and so are most stocks in the Nasdaq. The stock market is just dead money. Often in bearish and topping markets you get a drop in the first quarter and then a sharp fast rebound that leads to a drifting top. That seems to me to be what is happening. I noticed on Friday that a lot of stocks simply dumped worse than the averages did too. Now with the stock market with the market now right below the 2,100 level on the S&P 500 the risks are simply to the downside so that is where the surprises will be going forward. If I had lots of traditional investments in the stock market or stocks like Apple no longer working I wanted to get out of I would just do it now if it was me even though I think the market could hold in there to the end of July. My thoughts on that are that we ll likely see the market dip down and probably go into the 2,000-2,020 area of the S&P 500 and bounce for a final peak. I don t know if that bounce would be able to go back to where things are now or not though. The two things I m looking at in July to make a market turning point are earnings and the Fed meeting on July 27. Rate hike predictions for June and July were crushed after Friday s employment data, but Fed meetings tend to be around strange turning points in the markets. No matter whether you are in a bull or a bear market there also tends to be a rally or bounce during quarterly earnings season. One thing I have noticed is that in three out of four of the last quarterly earnings periods the stock market peaked out for good on the day that Facebook reported earnings. Facebook is really the last true fad earnings stock left that so many people are still playing. So there are lots of people buying into Facebook earnings and selling the news or just getting hyped up on earnings day and buying the gap up thanks to the excitement on Fast Money and CNBC about it. Facebook reports earnings sometime in the July 27 August 1st time period. So I think the market is likely to really drift and with more up and down action between now and then and have the next real big sustain-
7 able downleg that lasts more than just 5-10 days after the FB earnings announcement. There are lots of funds actually hiding in Facebook, because Facebook is displaying strong relative strength against the stock market and trading with a low correlation to the S&P 500. Their computer programs tell them it is a nice safe haven as a result. Amazon acted like that in the last bear market and is doing this now too. I point this out not to say you should buy Facebook, but to explain why it is now such an important stock in the stock market. Buy the rumor and sell the news for Facebook can impact the stock market. Back in the 2000-2003 bear market CSCO provided a lot of earnings excitement and its earnings date often would mark the end of stock market rallies. CSCO had these earnings releases towards the end of those quarterly earnings seasons, which is also what Facebook is doing now too. CSCO was one of the most widely owned stocks back then like FB is now. My plan is very simple. I plan on continuing to hold my core rebalancing ETF portfolio positions. With the market I am going to continue to research to find more POS stocks to bet against to profit from a late summer slump. With mining stocks I believe that they can now be simply traded or bought on an individual basis. What I mean by this is with the mining stocks acting so much stronger than gold there will be some mining stocks that simply go up and up this summer no matter what gold or silver do. So in analyzing a mining stock I would simply not worry about what gold is doing or even GDX at this point, but what the chart of the stock itself is telling you and the fundamentals of the company. I will continue to look for good private placement deals to get into too. Hopefully will find one or two by the end of July. Here are some charts of note for this week:
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10 MODEL REBALANCING ETF PORTFOLIO ALLOCATION The goal of this portfolio is to have five have core positions with no more than 20% invested in each one that together provide an investment allocation with a low intra-portfolio matrix. This makes it so that when one ETF goes down another can go up overtime. Traditionally people do this with using US stocks and Treasury bonds, but in the long-run a mix of more diversified assets can generate superior investment returns and if one day stocks and T-bills go down together then it will be a necessity. To make the strategy work one must also rebalance the positions to maintain the fixed allocation percentages. Rebalancing also boosts returns overtime and lowers the overall volatility of the account. To make this work monthly or weekly rebalancing is best. For more on how this strategy works read my January monthly newsletter from 2015. http://wallstreetwindow.com/wswmonthly/wswmonthly01012015.pdf Also see module 7 of my Bear Market Power Pack for several videos and academic papers about this market strategy: http://www.wallstreetwindow.com/powerinvestor/?page_id=1346 Right now my recommended mix of ETF s is the following: 20% - SDS: Ultra Short 2X S&P 600 20% - DXD: Ultra Short 2X Dow-30 20% - CEF: Fund that invests in gold and silver 20% - GDX: Fund that invests in mining stocks 20% - DBA: Fund that invests in agriculture commodities. This generates an intra-portfolio correlation of 0.27. A 50% in TLT and 50% in SPY currently generates a correlation of 0.29.You can use your own ETF s or funds to play with correlations by going to this website: http://www.investspy.com/ A correlation of 1.00 would mean that everything in a portfolio is trading together. With these positions at this moment I do not expect DBA to go up over the next few weeks. It may be pushed down with the stock market before it breaks out. I have core positions in my trading and investment accounts roughly invested like this. If you want an alternative to DBA you may want to consider SJB, which trades opposite to junk bonds.
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