Ask us anything Answers: Part 2

Here we go with the answers for the final questions posted on the Ask Us Anything blog. Again, we’ve grouped a couple of the questions together when they on similar topics. Enjoy!

Gold & Oil

Q: Marc asked about buying gold against other assets that may decline. Marc’s question was multi-faceted. Should he buy gold in C$ or USD? Are there ETF’s holding gold directly proportionate to the market cap?

Craig’s A: One of the reasons many investors reason/take a position in gold is protection/hedge a weakening USD. As a Canadian investor it may then be advantageous to buy in CAD.

Often commodity ETFs use futures to get exposure to a specific asset. This is often then becomes a leveraged play on the asset which may turn out to be positive or negative. To gain exposure to the spot price specifically is not as common. To gain gold exposure in CAD you may want to explore iShares CGL ETF. You can also look at the Global X (Horizons) futures contract HUG ETF in Canada.

For direct exposure you may be interested in exploring the Sprott Physical Gold Trust PHYS in the US market. 

Q: Jia asks for a few ETFs to consider for gold and energy exposure. 

A: A few to consider are;

GOLD 

To repeat a few from Marc’s answer:

CGL ETF: physical gold  IAU ETF: Gold Trust producer XGD ETF: iShares HUG ETF: gold futures hedged to CAD

ENERGY

XLE ETF: ( State Street S&P 500  names) USO ETF: structured commodity pool ZEO ETF: BMO equal weight passive

Each of these ETFs give exposure differently, using various strategies. Please ensure your diligence is thorough.

Marc also asked about USO’s efficiencies–so Craig provided these notes:

USO- Is a commodity pool, as structured product that gives exposure to oil through futures contracts that are rather short. The expiration of contracts will cause inefficiencies over time. For longer term exposure to the sector a large cap energy ETF may achieve your objectives.

Hedging using an Inverse ETF

Q: R J. asks for ideas on using an inverse ETF to hedge a market index like XIU.

A: Once again, this is a topic discussed in great detail in the Online Trading Course. Its hard to go into all of the details here, but we can cover the basics today.

Craig’s answer:

HIX (Beta Pro S&P TSX 60 Daily Inverse) This is supposed to be a 100% inverse to the S&P TSX 60. As you describe, this should be a direct offset to the XIU ( iShares). The HIX is not a multiple inverse, just a straight 1x inverse, so its not a neartermed  directional bet. Over the longer term some slippage in the precise inverse relationship should be expected.

Of note: with a single inverse ETF, the idea is to use a 1:1 ratio against the % of the portfolio you want to hedge. Keep in mind that no inverse ETF is entirely efficient, as you will see on the chart below. If you have 10% of the portfolio in the inverse ETF, you have offset approximately 10% of equity – assuming that equity has a beta 1 to the index that the inverse ETF is matched against. Example: you buy $1 of a TSX ETF like HXT, and $1 of HIX inverse ETF. Assuming they are both perfectly correlated to the TSX 60 (which they are not), you will not make, or lose, in any market environment.

Here is a chart illustrating the near-perfect negative correlation

Insider buying

Q: I’ll copy Paula’s question directly, as its got a few moving parts to it:

I’ve seen credible research showing that net insider buying for US stocks at a 10 year low. Can you address this issue and why it’s happening right now? How significant is it for returns going forward? I’m assuming C-suites don’t see good value right here in the largest companies and megacaps, or are expecting some drawdown before the election in the fall, or don’t have cash to allocate at the moment.

A:

Craig’s answer:

While insider buying may be low, the companies themselves are buying back shares for their balance sheets often quite aggressively. As a result of this the insider buying window may be rather short. It has also been reported that the global IPO market so far this year has also been lower. Perhaps there is a relationship between insider buying and IPO growth that should be explored further.

Here is a sentimentrader.com chart of the ratio of Buys/ Sells of SPX 500 stocks. It is low right now. Perhaps due to some of the factors Craig notes.

Legging in

Q: Final question. David wants to know our strategy for legging in.

A: Before getting to Craig’s response, I will note that the entire system of buying and selling is presented in great detail in my Online Course. I highly, highly recommend that all readers of this blog take the course. I have priced it extremely low to enable readers to access the course. Here’s the link for more info: ValueTrend Technical Analysis

Craig’s reply:

We do not define the potential return with an absolute minimum spread to the target price. Several different factors may contribute to the decision to add another leg.  Examples may include; seasonals of the name, overall market expectation, volatility or beta of security, next level of resistance, etc.

An example may be appropriate, let’s use ABC company: Suppose we bought a ½ position at $40.00. 1.) resistance is at $45, with not any further resistance up to $60. If the stock breaks thru $45 may buy another ½. 2.) If support is at $35, trades down to the level, proves it wants to hold may buy ½ position. These are 2 different ways, but there are countless variations and scenarios that can lead to building a position.  

Keith’s notes:

I’ll provide an example using MSFT over the past year or so. The chart illustrates a base breakout followed by an uptrend. In this example, we have so far bought 2 legs of a projected 3 legs. At any time, the trendline can fail and you sell. Right now, you need confirmation of the trendline to hold before going in with the last leg. If it fails, you then reverse the strategy by selling – in this case half of your position. As / if/ when the stock falls, you look for the next exit point. See my online course.

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