Bonds, Stocks, and Gold
SCR's Finance Research & Forecast for April 28, 2009
From our global research division and the subsequent strategy analysts, the following financial excerpts (including forecasts) are from report revisions recently completed:
Research Observation (from report No. D3: Optimal Finance Research™ (USA) Aggressive Investing):
Theme: Investment Bonds vs. High Yield Bonds
(1) Observation of the Relative Strength: Results in the relative strength analysis of G. Sachs Invest Top Corporate Bond (LQD) versus High Yield Corporate Bond (HYG) indicate that LQD is underperforming HYG on a relative basis. Since the relative strength ratio measures the strength of the numerator versus the denominator, it has predictive potential. In this observation, the price path of the numerator G. Sachs Invest Top Corporate Bond (LQD) is decreasing relative to the denominator High Yield Corporate Bond (HYG). Therefore, at least in the near term, the implication is that HYG has the potential of outperforming LQD. Caution: LQD price path is currently neutral with a fairly horizontal direction.
(2) Observation of the Price Performance: G. Sachs Invest Top Corporate Bond (LQD) shows a shift from an upward price direction to a flat path.
(3) Observation of Market Type: Security demand conditions (measured by money flows) indicate potential continuation of the current market direction because the change in money flow is weak. This is relative to strong money flows going into equities. However, this status is dependent on the outcome of upcoming economic statistics.
(4) Possible Implication: The overall implication of the stated observations for LQD is Neutral, and has near term Neutral implications; therefore, LQD has neutral trend potential for at least the short-term. The analysis of LQD relative to HYG is useful as a sentiment indicator. When G. Sachs Invest Top Corporate Bond (LQD) is underperforming High Yield Corporate Bond (HYG) on a relative bases, it indicates that bond investors are bullish on the economy as a whole and on small business growth in particular.
Theme: Growth Stocks vs. Value Stocks
(1) Observation of the Relative Strength: Results in the relative strength analysis of DJ Wilshire Large Cap Growth (ELG) versus DJ Wilshire Large Cap Value (ELV) indicate that ELG is outperforming ELV on a relative basis. Since the relative strength ratio measures the strength of the numerator versus the denominator, it has predictive potential. In this observation, the price path of the numerator DJ Wilshire Large Cap Growth (ELG) is increasing relative to the denominator DJ Wilshire Large Cap Value (ELV). Therefore, at least in the near term, the implication is that ELG has the potential of outperforming ELV.
(2) Observation of the Price Performance: DJ Wilshire Large Cap Growth (ELG) shows a continuation of an upward price direction.
(3) Observation of Market Type: Security demand conditions (measured by money flows) indicate potential continuation of the current market direction because the change in money flow is quite strong for most of the growth based ETFs. This is relative to weaker money flows going into value based ETFs.
(4) Possible Implication: The overall implication of the stated observations for ELG is Bullish, and has near term Bullish implications; therefore, ELG has bullish trend potential for at least the short-term. The analysis of ELG relative to ELV is useful as a sentiment indicator. When DJ Wilshire Large Cap Growth (ELG) is outperforming DJ Wilshire Large Cap Value (ELV) on a relative bases, it indicates that investors are bullish on the economy as a whole and on small business growth in particular. Whether this observation holds will be determined by the economic indicators going forward. Currently, growth stocks outperforming value stocks indicate the bets are predicting a bottom near-term to the U.S. economic recession. We'll see.
Research Observation (from report No. RT-USA: Finance Trading - Strategically Ranked USA Securities):
Theme: Gold and Economy
(1) Observation of the Relative Price Performance: Market Vectors Gold Miners ETF (GDX), a top price performer, currently has a 3 month versus 6 month relative return in which the 3 month is dramatically less than the 6 month return. This indicates the rate of change in the 3 month return relative to the 6 month return is decreasing. Since the relative price performance measures the strength of money flows to a security, it has predictive potential. Thus, the implication indicates that GDX is strongly underperforming relative to 6 month historical performance. Therefore, at least in the near term, the implication is that GDX has the potential of continuing underperformance. The price performance of gold, and its derivatives, will depend on future economic developments.
(2) Observation of the Price Performance: Market Vectors Gold Miners ETF (GDX) shows a shift from outperformance during the last quarter of 2008 to a more neutral path during the first quarter of 2009. While having a more neutral price path, GDX still has shown dramatic volatility that can be seen in the year high of $51 with a year low of $15.
(3) Observation of Market Type: Security demand conditions (measured by money flows) indicate potential continuation of the current horizontal market because flows are quite weak. This will dramatically change, however, if the economy shows any further weakness.
(4) Possible Implication: The overall implication of the stated observations for Market Vectors Gold Miners ETF (GDX) is Neutral. While dramatically outperforming other asset classes over the last 6 months, its current performance indicates that most market participants are betting on the current U.S. economic contraction bottoming.
Hedge: Alerts, Exit Stops, or Options
In any strategy, possibly hedge your risk on positions taken by using alerts, exit strategies that contain protective stops, or options. Additionally, you might consider protecting your capital by possibly placing a small starter position (say 25% of the desired allocation) at first. If you choose to use actual exit stops, just realize that tighter stops will mean possibly getting "stopped out" frequently during volatile market swings.
Additional considerations:
First, for most investors, a diversified investment portfolio approach combining stocks, bonds, money market securities, etc., is optimal. While financial diversification cannot protect against a loss from a declining market, it can reduce the volatility of the overall portfolio.
Second, with the globalization of information technologies, college education becomes a prerequisite to most careers. Thus, a goal of successful investing in a variety of assets becomes crucial in providing the upper level education necessary for the future of your children. In consideration of that goal, studying the information available on this site, which has been kind enough to host our research in this article, will help. At www.StrategicCapitalResearch.com, we provide additional finance educational materials to what you find here in both investment books and videos. Between the two sites, you should be able to find enough information to get started toward achieving your education investment goals.
Third, to the above analysis excerpt, the usual disclaimers apply: (1) Company policy prohibits employee purchase of research securities until after an email has been sent to our revision notification subscribers; by the time this article is published, however, some SCR employees may own shares of the reported securities, and (2) Since all Strategic Capital Research publications provide research that is conducted using historical data, a reminder needs to be made that the analysis of past market reactions cannot predict future market actions. In particular, no amount of historical data can predict the sudden changes that occasionally occur in financial markets. In both types of risk scenarios, initial capital loss, and profit loss, we prefer prevention techniques that include exit strategies with stops that adjust for a security's volatility. An "Ultimate Collection" that include these more advanced exit techniques is can be found on the "Strategies: By Type" page in the "SCR: Strategies" section of the SCR site. We recommend that you study and use the more advanced techniques.
The SCR Analysts represent the collective voice of the researchers at Strategic Capital Research (SCR). We provide global financial analyses, and subsequent strategies, with forecasts from countries to companies. Copyright 2007-2009.
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