Silver and Gold(man) (SLV, GLD)

Silver and Gold(man) (SLV, GLD)

Some folk are born without hair but eventually develop a crop that covers their bodies in the traditional manner.

Others are born bald and baby-like and never see much growth for the full span of their lives.

And we’re left to wonder – why is it the measure of a man’s hair should vary so greatly? Moreover, of what import is it to us as investors? And why do we take the time to write of it here in our weekly Profit Hunter missive?

The truth is manifold, friends, and it’s not for nothing that we do a little hair-raising today.

Faith, we say. And read on.

hat

We’ve got some explaining to do.

Let’s back up.

Our understanding of the market and where it’s headed is based on a number of macro themes that we see playing out over the months and possibly years ahead. They’re trends that began at the beginning of the bull market, and we’ve gone over them with enough frequency that they don’t require a great deal of review today.

At the same time, however, there are a number of market-related memes that offer investors precisely nothing but clouds and confusion, and we feel they should be addressed and dispelled forthwith – particularly those red herring notions that get repeated on an almost daily basis and have many convinced of the lies they purvey.

We’re going to attempt to address them in turn, beginning with the notion of risk.

Those paying attention have likely already noted that the financial press and its talking heads have a penchant to speak about whether a particular trading session or overseas market or individual stock has been moving as result of traders adopting a ‘risk-on’ or ‘risk-off’ posture.

It’s nonsense.

“Risk on/risk off” is a designation that’s all but meaningless, as it speaks to a time horizon that’s useful only to the shortest of short-term traders and has no bearing on the underlying currents that are driving the market as a whole.

So what is, in fact, driving this market?

Some would have you believe that the greatest investment gains are to be had from assuming risk via big growth stories like Tesla (TSLA) or Facebook (FB), and that old line value names should be avoided by those who want to maximize their profits.

And to that, too, we say balderdash.

The market is driven today by cash flows that have already begun pushing valuations to levels that make little sense. So any debate of growth vs. value as a tactical means of achieving greater alpha is already edging toward the nonsensical.

There is no risk calculation that matters. Nor do growth or value play a role in optimal stock selection anymore.

The bottom line is massive flows of cash are entering the market and will continue to do so in an accelerated manner as we move forward. That means placement of funds will decreasingly be predicated upon traditional considerations like those mentioned above, and more on ‘stock market branding’ as it were.

rock

It’s not a term we’ve seen anywhere but here, but it’s key to understanding the psychology that’s driving prices higher and exactly where the vectors of greatest flight will be found.

Put very simply, stock market branding describes the success with which a company markets not their product or service, but their stock. And let’s face(book) it, every company is in the business of selling their stock, some with greater effort and resources, others with less.

That is to say, a company like Facebook with lots of excitement surrounding it and a sky-high earnings multiple, with real but unpredictable earnings, with a news media hot to scoop every blemish on its pimply-faced owners, will do a whole lot better in the months and years ahead than an old-line, boring outfit like E.I. DuPont de Nemours & Co. (NYSE:DD), a Dow Jones Industrial component since 1935, but not particularly well branded in our high-tech, fast-paced world of digital adver-journalism.

moon

That’s not to say DD stock won’t climb going forward. Only that eventually it’ll get left behind in the race to own the most popular stocks, the chic, the avant-garde, those with cache, that can be talked about and fawned over and bragged about, because that’s unfortunately what we’ve come to.

Look here –

cache

The process has already started, with the biggest, Hollywood starlet names starting to outperform those who are less well known.

And so it will continue.

Combing our Way through the Stock Universe

We’re going to introduce this week’s trade by saying, very simply, that it’s unconventional. It’s a pairs trade, which is orthodox enough. But it matches two stocks that are as diverse as they come – one a leading international broker/dealer, the other an industrial metal, for the most part.

And we’re pairing the two not because there’s some sort of inter-market relationship that obtains between their respective sectors, but because one looks toppy and in need of a trim, while the other appears to have bottomed.

The stocks in question are Goldman Sachs (NYSE:GS) and the iShares Silver Trust ETF (NYSE:SLV), and their charts look like this –

gs

Goldman went on a five-month tear after bottoming in April, but now appears due for a rest, most notably after posting an RSI 80 read (in blue) just three sessions back.

In contrast, silver has been declining escalator-like until two trading sessions ago, when she registered a deeply oversold RSI print.

Look here –

slv

SLV had little reason to rally until the recent oversold RSI condition was in place. Now that it’s here, she’s got room to grow, and we should see at least some short covering if not a modest rally.

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The Profit Hunter therefore recommends you consider buying the SLV December 18 CALL for $0.37 and selling the GS October 31st 197.50 CALL for $0.44. Every pair bags you a seven-dollar credit.

Watch those expiries. They can get bit hairy.

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The Profit Hunter therefore recommends you consider buying the SLV December 18 CALL for $0.37 and selling the GS October 31st 197.50 CALL for $0.44. Every pair bags you a seven-dollar credit.

Watch those expiries. They can get bit hairy.

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With love of the hunt,

Hugh L. OHaynew, Senior Analyst, The Profit Hunter

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