Taking a More Active Approach

Our recommended trades, as always, are closely informed by our indicators. We expect most of our trades will continue to involve ETFs that reflect those indicators, which currently forecast the S&P 500, the dollar, gold, gold stocks, silver, oil, oil stocks, and base commodities.

We are working to produce indicators for additional currencies and for other U.S.-based ETFs, for example, ETFs tracking financial stocks and tech stocks. One important criterion we apply in developing a new indicator is that it must not overlap too much – i.e., not correlate too highly – with our other indicators.

You might ask, then, why we have separate indicators for oil and oil stocks and for gold and gold stocks, and it’s a good question. The answer is that it’s not that unusual to see divergences between the underlying resources and the companies that produce them.

Today’s situation is a case in point. While our indicator for oil stocks remains on a buy signal, the indicator for oil is neutral. And the indicator for gold the metal is bearish, but the indicator for gold stocks has improved in the past week and now is neutral. For good measure, our indicator for silver, often a strong correlate with gold, is also neutral but closer to positive than the indicators for gold and gold stocks.

We realize that many subscribers are eager for more action than we can offer based on following our current eight indicators, or even the 12 or so we hope will soon be in our stable. One constraint is that most of the time only a few of our indicators will be in a zone we consider as a clear buy or a clear sell. That’s why we made the decision to start recommending stocks associated with our indicators. Picking out individual stocks definitely allows for more action but also brings with it a greater probability of failure – hopefully more than compensated for by the greater opportunity for larger gains.

With a single stock, as opposed to an ETF, a lot more can go right and lot more can go wrong. Going into the Fed decision today, we decided to reduce our recommendations to a single stock, Applied Materials (NASADAQ: AMAT). The stock is cheap by virtually every metric, from its P/E to its FCF (free cash flow) yield to its PEG ratio. Wall Street is treating this leading manufacturer of semiconductor equipment as if it’s a cyclical company on the verge of a downturn. Our view is that the semiconductor industry will be much less cyclical than in the past.

That said, there has been a whiff of bad news on Apple (NASDAQ: AAPL) in the form of low – but we don’t think unexpectedly low – pre-orders in China for the new iPhone, putting virtually all tech stocks on the defensive. Broader-based indicators are clearly not equipped to go that deeply into the weeds. We think it is still too early to write off the shorter-term performance of Applied Materials and will likely stay with the stock until our SPY indicator tells us otherwise.

One message for subscribers is that if you are risk adverse, you should probably stay away from our individual stock picks and focus on the ETFs. For now the SPY remains on a buy signal, but two stronger signals are the negative signal on gold and the positive signal on oil stocks. You might need to give us a couple of days, but we should have more trades once we assess the effects of the Fed on the indicators.


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