BigTrends

The relationships between the US Dollar, Gold, the Stock Market, and Bonds is a complex, inter-related one that changes over time.  However, there are noticeable trends and "push/pulls" that one can spot in a price performance chart.

Take a look at this following chart of the PowerShares US Dollar Index (UUP) and the SPDR Gold Trust (GLD):



What you can see clearly here is that the down move in the Dollar that began in late-2008 was in tandem with a big rise in Gold.  The Gold move peaked in early December of last year.  Since that time, the Dollar (represented by the UUP) has been on a steady uptrend versus its basket of world currencies (Euro, Yen, Pound, Canadian Dollar, Krona, Franc).  Meanwhile, GLD is heading lower.

The simple conclusion I draw from this chart is that continued strength in the UUP/Dollar will lead to further downside in GLD/Gold.  The relationship between the US Stock Market and the Dollar is not as strong currently in my analysis.

You may well think that the Dollar will eventually resume its downward slide, and Gold will have another big upleg.  But "don't fight the tape" as Jesse Livermore would say -- and currently the UUP is showing strong technicals.

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We previously examined the performance of various country-specific ETFs in 2010 and Japan (EWJ) and Russia (RSX) were standouts.  This trend has shown no sign of abating, and may well continue throughout 2010.  In particular Japan, which has been a "dead money" market for about 20 years now, may be poised for relative outperformance gains in 2010 vis-a-vis some other major country ETFs.

The other international ETFs profiled in the chart include India (PIN) in purple, Canada (EWC) in white, Australia (EWA) in blue, China (FXI) in green,  Germany (EWG) in orange, and Brazil (EWZ) in yellow.  Brazil is the laggard of these countries thus far this calendar year.

If you don't buy my assertion that Japan may outperform this year and prefer to bank on a rebound by the current bottom performer Brazil, then one could attempt to "fade" the current trend by going long EWZ (through stock or options) and shorting EWJ for roughly the same amount.  That would be considered a "paired" or hedged trade.

Examining the Top 10 holdings of the iShares MSCI Japan Index (EWJ), it looks to be a pretty well-diversified ETF.  Only 1 of the Top 10 holdings is over 3% of its assets, that being Toyota at 5.4% as of the latest reporting.  Certainly the recent troubles of Toyota USA should be taken into account when trading or investing in the EWJ.



ETF Relative Performance Chart

I took a look at about 15 of the major single-country ETFs in terms of 2010 performance.  There were 2 clear names topping the list and 2 lagging the pack:  Russia (RSX) and Japan (EWJ) were the outperformers, both up over 7% YTD.  China (FXI) and Brazil (EWZ) are the laggards thus far, each down over 1% in 2010.

Hard to say what the causation/correlation is between these countries at this point, because Russia and Brazil are often considered "commodity play" countries.  Currency fluctuations may be playing some part.  But it's something to keep an eye on, especially Japan which has been a laggard for many years now.  There may be some good relative gains to be made in that slumbering economic power contained in a tiny set of islands.

It's that time of year again when investors start adjusting the rear-view [investment] mirror as they look forward to a new year of money making trends. It's a good time to peruse the free analysis available, all-the-way from the top investment banks down to your local advisor, but be selective and filter out the noise because a lot can be misleading or incorrect.

That said, I found this handy little document called, Goldman Sachs Global Viewpoint - Top Trade Ideas for 2010, which covers Goldman's (GS) top 8 trade ideas for 2010. In my view, it's well worth the time to scroll through the short 7 page analysis, there are some ideas that I agree with - for example, Trade #2 is LONG RUSSIA Equities (RSX), this points towards the strength in BRIC countries (BTW, Goldman coined that acronym back in 2001), however, I would expect Brazil (EWZ) to be a larger beneficiary of BRIC investments next year. I'll be covering the details of Brazil in BigTrends 2010 Outlook due out next week (sign up for a free BigTrends Insider account to receive)

Tell us what you think about these trade ideas below, I'm especially interested in the 12 month volatility play...

Much focus and attention these days among investors, traders, politicians, and the media is on China.  With good reason.  Demographics and a growing economy may make this the "Century of China".

However, there is another Asian economy and market that you shouldn't forget about:  India.  This is a country with a massive population and growing education and business base.  Incremental increases in the growth of lower and middle classes in countries like India and China can have earthquake-like fiscal effects.

Take a look below at the relative performance of the Powershares India ETF (PIN) versus the iShares Xinhua China Index (FXI).  You might be surprised to see that the India ETF PIN has outperformed the China ETF FXI since the March 9th, 2009 market bottom.

FXI vs PIN Price Performance Chart

Here are the top holdings of the PIN ETF (as of 9/30/09):

Ok, I took that line from the Austin Powers movie GOLDFINGER.  But truth be told, everyone seems to love gold now.  That could be a concern as not everyone can make big money on this all the time.  However, Goldman Sachs is out with the following take on the metal:

Goldman Sachs is forecasting that Gold prices could reach $1200 by year end if ten-year TIPS remain at current levels and central banks continue to buy gold bullion. Two ETFs that provide a leveraged way to play the potential rise in gold prices are GDX and GDXJ which is being launched this morning 

I said this during our interview with Price and Kevin Cook back in September, before gold hit 1,000.  Kevin seemed rather surprised, too!   Here is the link:

http://www.onn.tv/videos/street-smarts/bigtrendscoms-price-headly-and-bob-lang/

What did we know back then?  hmmm.  Perhaps they are watching us?  Who knows.

The Bank Sector (and larger Financial Sector) has often led the market in both directions over the past few years.  Recently, we've seen the Bank Group break down significantly, underperforming most other market groups.

If you examine the chart of the PHLX Bank Index (BKX) below, you can see that we have broken down below the recent slightly uptrending range.  In addition, Daily Percent R has plummeted to bearish territory.

Bottom line, I'm concerned that weakness in the Bank Sector is telling us something ... and may spread to other Financials and the overall market, leading to continued near-term weakness in the major indices.

BKX Daily Chart

It looks like there was a large lot purchase of 6,000 November 54 Puts on the iShares Oil & Gas Exploration Index (IEO) today.  According to the ISE data, this was a straight Put purchase and not part of a spread or hedged trade.  It is not always certain in these cases, however, if there is an underlying stock position that could be part of a hedged position.

Something to keep in mind, as this security has very low open interest.  When analyzing these types of trades to attempt to gain an edge, it will usually require further research and study to determine patterns of "smart" or "dumb" money ... or whether they may be hedge/volatility or other types of institutional trades that are not strictly directional based.

The Top 10 holdings of IEO as of 9/30/2009:

Much has been made of the recent rally in Gold, but actually Silver has outperformed recently.

Take a look at the following relative performance chart of Gold (GLD) versus Silver (SLV).  GLD is in yellow, SLV in gray.

SLV vs. GLD Performance Chart


You can see that since mid-July, SLV is up over 30%, while GLD is up around 10%.

However, Andrew Hart noted in our ETF Options Trader program that the Gold/Silver Ratio has reached extreme lows (Chart below).  The previous two times this occurred marked a short-term TOP in Gold & Silver prices.  Something to keep in mind.

Gold: Silver Ratio

The US Dollar has been very weak lately, and we reached a support level this week that is very important.  Using the UUP which is a Dollar Bullish ETF, we can chart the movement of the US Dollar and predict future patterns.