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April 10, 2017 | Posted by David Zarling, Head of Investment Research

This Is How The Relationship Between Lumber And Gold Will Impact Your Portfolio

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Many investors tend to focus on asset-class specific study to gain an edge. They attempt to obtain outperformance based on factors directly related to the asset class being studied. This is an appropriate practice and can provide valuable insight. But in this post, similar to last week’s article on the relationship between Copper and Latin American equities, we’re going to look at the relationship between Lumber and Gold. Specifically, we’re going to follow-up on previous research showing the relationship between Lumber and Gold contain insights into risk-seeking and risk-averse behavior in stocks. The Lumber/Gold relationship is not a novel idea. This important connection was brought to the fore by Charlie Bilello and Michael Gayed in their 2015 NAAIM Wagner Award Winning Paper, “Lumber: Worth Its Weight In Gold.” Charlie and Michael are extremely smart asset managers with strong thought leadership when it comes to actively managing funds. We can’t hold their intellectual jocks, but we can use their research and look into the current state of Lumber and Gold to find another piece of evidence for managing risk in today’s market. In their research, they find:

As Lumber outperforms Gold, equities tend to exhibit an upward bias and have lower volatility. These are conditions that are conducive towards maintaining higher exposure to risk assets. As Gold outperforms Lumber, the opposite tends to be true, whereby the inclusion of lower beta assets in a portfolio increases overall return and lowers volatility at the time it is needed most. The relationship between Lumber and Gold helps to answer the most critical question for active asset managers: when to take more risk (“play offense”) and when to take less risk (“play defense”) in an investment portfolio – before it’s too late.

The relationship between Gold and Lumber can give us valuable insight into U.S. stock market volatility and risk. As market participants, we can use this relationship to give us an edge. Simply put, their findings highlight when Lumber is outperforming Gold, it is a risk-on (offensive) characteristic for stocks. In this scenario, investors can be more aggressive with their equity exposure. Oppositely, when Gold is outperforming Lumber, this is risk-off (defensive) behavior and investors should take a more protective stance. Accordingly, it makes sense for us to dig into how Lumber and Gold are performing and conclude with a review of their relative strength to each other.

Here’s the weekly chart of Gold:

Gold Weekly Chart

Gold remains in a downtrend from weekly perspective. Since 2011, everyone’s favorite precious metal has been making lower highs and lower lows, the very definition of a downtrend. That is, until recently. In early 2017, Gold locked in a higher lower. This was a productive step towards trend change. If it can break through the upper green trend line, we’ll have a break in trend momentum. A close above $1,375 would establish a higher high and a potential new uptrend underway. For now, it remains within compression (two converging trendlines). Out of this compression will come a move that most likely will determine Gold’s future in the weeks and months ahead.

As for Lumber, here’s its respective weekly chart:

Lumber Weekly Chart

Lumber broke out of a downtrend in early 2016. In fact, Lumber’s higher low in February 2016 coincided with a bottom in U.S. stocks. Never discount coincidence. Since then, Lumber has continued to establish higher highs and higher lows in price. Just last week, it broke from a month’s long consolidation to make an attempt at the early 2013 highs. A break above the $400 level would be extremely productive for Lumber overall.

Now, here’s what you’ve been waiting for. The weekly chart of Lumber : Gold. As a friendly reminder, when Lumber is outperforming Gold, the ratio rises. When Gold is outperforming Lumber, the ratio falls.

Lumber:Gold Weekly Chart

Even going back to 2011, we can see the ratio bottom in August of that same year. Do you know what also bottomed at the very same time? The S&P 500. The ratio broke out of a long-term downtrend in late 2012, which preceded the S&P 500 breaking to fresh all-time-highs in August 2013. Similarly, this important ratio broke down in late 2014, which preceded an S&P 500 breakdown in July 2015. More recently, we’ve seen Lumber outperform Gold and establish a higher low in February 2016 and breakout of an intermediate downtrend in November 2016. Since then, the ratio has been continuing its movement upwards signaling risk-on behavior in stocks and diminishing volatility overall. We’ve definitely seen stocks take off since then and volatility crushed with one of the calmest markets in history during this time frame. Just last week, as Lumber broke towards its 2013 highs, this ratio also broke out to a level not seen in eight years.

The next few weeks will be crucial for this relationship and the significance it carries for equities overall. Lumber needs to break through the $400 level in order to ratio to hold onto its recent breakout. If Lumber : Gold can hold onto these recent highs, it will likely mean further upside for equities (especially high beta equities) and suppression of volatility. On the flip side, if Lumber falters here while Gold continues to move upward, the ratio will roll over, signaling a need to take a defensive stance in your portfolio.

As always, you can get real-time updates and commentary about this development and many more opportunities here: @360Research

AND, you’ve got FREE access to an investing tool we’ve created, The Ultimate ETF Cheat Sheet. It’s an easy-to-use resource guide.


Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. You invest based on your own decisions. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this blog. Please see our Disclosure page for full disclaimer.

Filed Under: Breakdown, Commodity, Equity, Gold, Intermarket Analysis, Lumber, Market Outlook, Precious Metals, Ratio Analysis, Risk Management, S&P 500, Soft Commodity, Volatility Tagged With: $CUT, $GC_F, $GLD, $GOLD, $LS_F, $LUMBER, $SPX, $SPY, $WOOD

May 14, 2015 | Posted by David Zarling, Head of Investment Research

Silver: It’s Time

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When we look for low risk / high reward entries in any investment, we need to be patient, waiting for those times where our risk and reward are well defined. Way back in November, we told you about an upcoming opportunity in Silver. Using cycles, we were looking for a low sometime between November and February along with a downside target near 14.00. Here’s the chart from back in November.

(click to enlarge)

SLV

How do we look today?

SLVPrice didn’t quite reach 14.00, but we’re not picky. We’re seeing a nice base with lows near our expected cycle low. In addition, we’re seeing price breakout from a 2.5 year downward trendline (dashed green line) and overhead resistance (supply) near 16.50. Adding evidence to our low risk entry is the beautiful divergence in momentum, making higher lows while price makes even lows. This is a significant move with well defined risk. Let’s zoom in and get tactical.

SLV Tactics

As you can see, the breakout breaches two significant areas of resistance. From a risk management standpoint, we have no reason to own it below 16.20. Our initial upward target is 18ish, but we will be watching price action closely if/when it reaches the solid green downward trendline, which has been significant resistance dating back to the 2011 top in this industrial metal. If that trendline is broken, we could have a rip-your-face-off rally. But let’s not get ahead of price. Let’s let it show us what to do. Trade safe.


Disclosure: The author is long SLV.

Disclaimer: Nothing in this article should be construed as investment advice or a solicitation to buy or sell a security. Simply put, you are an adult. You invest based on your own decisions.

Filed Under: Commodity, Cycles, ETF, Precious Metals, Silver, Techniques & Tactics Tagged With: $AGZ, $SI, $SLV, $SVZ, $XSN, Bottom, Confluence, Cycles, descending triagle, Downside Targets, Equilibrium, measured move, Silver

November 1, 2014 | Posted by David Zarling, Head of Investment Research

Silver Linings Playbook

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Since April, 2011, Silver has been getting crushed. When I say crushed, I mean it. Down over 65%, this precious/industrial commodity has been a wasteland for those hoping it would increase in price. We don’t fight price. Price is the manifestation of opinion and final arbiter of value. Price knows more than we do. We simply identify opportunities. And Silver, curious investor, may be approaching the best investment opportunity of the next decade. But let’s not get ahead of ourselves. There’s likely more downside to come. Between Thursday and Friday, Silver (represented here by SLV, the Silver ETF), continued its relentless downtrend – down another 7%.

We have some targets identified where a bottom in Silver seems logical. See the chart below (click it to embiggen). At first, it may seem a little confusing, but it’s really quite simple. Price moves to equilibrium. The orange annotations mark two measured moves (from the 2011-2013 broken descending triangle and from the 2013-2014 broken descending triangle). Those two measured moves end up within 10 cents of each other. We don’t get picky. The 13.50 – 14.00 range should provide stiff resistance to any further downside pressure. Assisting this logical turning point, is the downward trendline in green. And to help us in timing any potential bottom are some very accurate cycles (annotated in purple). Focus your eyes on only the cycles, you’ll notice they align with many minor and major turning points. Adding everything up, we are going to be looking for a major low in Silver sometime between now and February, 2015. Our price target is between 13.50 – 14.00. Once we reach that level, we’ll be looking for evidence of a change of direction. If/when that happens, I’ll let you know and share with you why this could a be major opportunity.

Stalking Silver
Stalking Silver

Filed Under: Commodity, Cycles, Hard Commodity, Precious Metals, Silver Tagged With: $AGZ, $SI, $SLV, $SVZ, $XSN, Bottom, Confluence, Cycles, descending triagle, Downside Target, Equilibrium, measured move, Sliver

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