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ETF Picks: Consider This Diversified Partial Portfolio

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It's been put together with the timeliest signals available.

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Editor's note: The following is an edited version of the first edition of the Grail ETF & Equity Investor newsletter by Ron Coby & Denny Lamson using their proprietary Lamson Grail Timing Indicator. This premium newsletter was just launched by Minyanville on Monday. Learn more or sign up for a FREE 14 day trial to receive future issues.


We're very excited to team with Minyanville on this newsletter, and pledge to deliver our most timely ETF and market calls to you.

In this launch phase of our program, we find ourselves in a very interesting time. It's a period of time we believe will prove to have been a topping process that will lead to a much weaker market next year. So, in the short run, we'll look for oversold sectors to buy until the market reverses, but we'll be very diligent in catching the down turn as it materializes.

Our goal with this program is to catch major trend changes as early as we can, and hold them for as long as the trend remains in force. This is a compelling reason to get in this program and stay in this program. Staying with big trends and exiting them on a disciplined and timely basis are the two biggest challenges for both traders and investors. Our initial portfolio will reflect a cautious outlook, without sacrificing upside potential should the market continue to move higher.

You'll also note that we've posted a module consisting of major market trends and what our Grail indicator is saying about each over long-, intermediate-, and short-term time frames. While we'll focus primarily on ETFs and some individual stock picks, it's also important to have an eye on the macro picture. We'll update it as our outlook changes over time and we'll alert you as to rationale. Here's where we currently stand.




Stocks are still in an uptrend from the March lows, but many signs of a top are appearing. The stock market has entered its most seasonally bullish period for the bulls, but this market is reminiscent of late 2007 to the bears. Until the S&P 500 breaks 1019 on a closing basis, the bulls and the Fed are in total control. It will take a pivot point break under 1019 and several closes below the 55-day moving average to break the back of the bulls. The S&P 500 is also failing at the long-term downtrend line near the 50% Fibonacci retracement of the entire 2007-2009 decline.

The best strategy in the stock market at this moment is to look for stocks in sectors that are oversold to purchase and sectors that are overbought to short. This isn't a market to be a hero in -- on either the bullish or bearish side (see, In This Bull Market, Don't Be a Hero). So for protection, have a cash cushion or play both sides of the tape with your sell and buy stops firmly in place.

Thirty-year Bonds appear to be developing a giant head-and-shoulders top on the weekly charts. The message of the bond market is supply, supply, supply. The good news is that there's been plenty of demand for steadily eroding bond prices since their giant bubble peak in December 2008. Bonds will more than likely be in a long-term secular bear market because of the endless amount of supply needed to keep the US government alive. The potential upside for bond bulls will materialize if the US economy heads into a W-shaped recovery. Should that happen, we may see the "fear trade" materialize once again and 30-year bonds may actually test those bubble highs.

Metals in general have been in a bull market since March 2009. Gold, however, has been in a giant secular bull market for nearly a decade, and gold looks to go much higher in the long term. In the near term, gold has some overbought issues and near-term negative divergences to deal with. Gold and gold stocks are best purchased after corrections when a buy signal is given. The potential near-term negative event for gold is if the dollar "carry trade" turns into a short squeeze on the dollar. That will cause gold and all metals to initially get hit when that happens. Silver, while testing new highs, is showing some negative RSI divergences, so a correction is likely coming for both gold and silver. Copper is bullish, and will continue to rise after all corrections so long as the economy appears to be improving. The bull story is that China is diversifying out of US paper into metals and "stuff'." China must really like this "print Yaun and trade it for metals trade." We've taught them well.

Energies
are generally bullish across the board. However, they're all in their seasonally weakest period until year-end. Oil looks great on the weekly charts and is setting up well for a big move up in the first half of 2010. Natural gas prices have basically collapsed because of too much supply and weakened demand. 2010 should be a better year for natural gas, so this may be a "buy low" opportunity. Energy stocks can be purchased on all corrections as long as the uptrend continues.

Initial Grail ETF Picks

In this initial launch, instead of entering our portfolio one Grail signal at a time, we've constructed a diversified "partial" portfolio using the timeliest signals we currently have available to us. In this initial group of picks, some of the signals may be a few days old, whereas in the future, all signals will be given to our subscribers precisely as they occur. We'll be filling out the remainder of the portfolio in the coming weeks.

Another thing we'd like to make you aware of is during this initial launch phase, we'll be taking smaller than normal positions at entry, and filling them out when we get further confirmation from the Grail Timing Indicator. A normal position for us would be 5% to 10% of the portfolio value. Stocks are never more than 5% and ETFs are never more than 10%. We'll be working with positions half that size for the time being. We suggest you do as well.

The final thing we'd like to make you aware of is that we may have more activity during this time than what would be normal. Because of the advanced stage the market is in, we'll be setting our stop losses a bit closer than we might ordinarily. This is just a precaution we deem to be advisable with the market having moved as far up as it has, and with the distinct possibility that we'll soon be having a significant correction.

So with all the explanations done, here's our initial recommended portfolio.

Initial Positions

WilderHill Clean Energy Powershare (PBW)
Position: Long from $9.99 (Monday open)
Type: Type 1 Buy (Divergence)
Initial Stop Loss: $9.40
% of Portfolio: 5%

PBW has been oscillating between $9.00 and $11.50 since June. Having successfully tested its September low, this ETF appears ready to move back to the high of the range.



Nasdaq Biotech I-Share (IBB)
Position: Long from $77.90 (Monday open)
Type: Type 1 Buy (Divergence)
Initial Stop Loss: $74.00
% of Portfolio: 5%

The Biotech sector has had a meaningful correction and appears to be turning upward. This is a higher risk trade, as the initial buy was given a few days ago. Therefore we'll purchase a one-half position size. The stocks in the sector we like are Biogen (BIIB), Cephalon (CEPH), and Genzyme (GENZ). You could buy one-third your position in each name to hedge against a surprise in any one stock. If you buy these stocks in lieu of the ETF, placing a stop below the most recent pivot would be smart.



US Dollar Bull Powershare (UUP)
Position: Long from $22.67 (Monday open)
Type: Type 1 Buy (Divergence)
Initial Stop Loss: $22.20
% of Porftolio: 2.5%

The US Dollar is the single most-out-of-favor sector in the markets with sentiment readings in excess of 95% bearish. Borrowing US dollars at near zero rates and investing the proceeds in other higher yielding currencies has become a VERY crowded trade indeed. We're contrarians here and will be taking a swing at each Grail Buy signal until a final bottom is put in. Picking bottoms isn't for the faint of heart. Understand you may have to get stopped out a time or two prior to a significant dollar rally.

The spike you see on the chart is from the SEC delaying the issuance of new shares for UUP. This caused a short-covering rally that's now created a premium to the underlying index. We'll buy a little here, and watch for the premium to decrease prior to buying a full position. Remember, this is a double, so we'll invest 50% of our normal investment.



S&P Consumer Staples SPDR
(XLP)
Position: Long from $26.41(Monday open)
Type: Type 2 Buy (Compression)
Initial Stop Loss: $25.40
% of Porftolio: 5%

Consumer staples has been on a tear and looks to want to move higher. In terms of timeliness, if you prefer to look for individual stocks in this sector, our favorites in the space are Walmart (WMT), Coca Cola (KO), Altria (MO), and Proctor & Gamble (PG). Be sure to diversify amongst these names.



S&P Utilities SPDR
(XLU)
Position: Long from $29.07 (Monday open)
Type: Type 1 Buy (Divergence)
Initial Stop Loss: $28.00
% of Portfolio: 5%

The spread between Treasury Bond yields and Utilities dividend yields is the widest it's been since the early 1980s. If this spread begins to narrow back to historic norms, utilities need to rally, or Treasury rates must rise -- or both. Our favorite individual Utilities would be Pepco Holdings (POM (7% yield)), Dominion Resources (D), and Teco Energy (TE).



Double Short Oil ETF
(SCO)
Position: Long 1/2 position from $12.96 (Monday open) and will look to fill the remainder on a break above $14.00
Type: Type 2 Buy (Compression)
Initial Stop Loss: $12.30
% of Portfolio: 2.5%

Remember, this is a double inverse so we'll purchase half of what we'd normally purchase.

On November 6, it would appear that oil put in a double top at $80 a barrel. The Grail has thrown off a sell on oil and it's probably due to the fact that global inventories are high and demand is very weak. Oil prices are this high because of tensions in the Middle East and excess global monetary liquidity. Below $76.50 a barrel the double top will be confirmed and oil prices could drop another $10-12 a barrel. We believe this would bring oil more in line with current and future fundamentals as well. Seasonally, oil is in a weak period until year-end.



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Position in PBW, IBB, UUP, XLP, XLU, SCO

This information is confidential and is intended only for the authorized subscriber. Please notify us if you have received this in error by telephoning 212-991-6200.

Ron Coby & Denny Lamson are the authors of the Grail ETF & Equity Investor newsletter. The Grail ETF & Equity Investor contains Messrs. Coby and Lamson's own opinions, and none of the information contained therein constitutes a recommendation by Coby, Lamson or Minyanville that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Messrs. Coby and Lamson will not advise you personally concerning the nature, potential, value or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. All information contained within the Grail ETF & Equity Investor newsletter is impersonal and not tailored to the investment needs of any specific person. Do not email Messrs. Coby or Lamson seeking personalized investment advice, which they cannot provide. Messrs. Coby and Lamson's past performance is not a guarantee of future performance and there is no guarantee that the suggested investments will have the desired results. The performance represented here is for informational purposes only, and should not be construed as an offer or solicitation of an offer to sell or buy any security. Please keep in mind that this Portfolio does not necessarily account for the different risk tolerances, investment objectives, and other criteria used by individual investors when making an investment decision. You are encouraged to conduct your own research and due diligence, and to seek the advice of a qualified securities professional before you make any investment.

Addition information on Coby Lamson can be found in its form ADV Part II located at www.cobylamson.com

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

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