When the Energy ETF (XLE) worked its way into the top 3 of the US Sector ETF portfolio in the first week of December, the protests in Tunisia were still almost two weeks away (Mohamed Bouazizi set fire to himself on December 17th).

XLE cracked into the top 5 on November 15th so depending on whether you were buying the top 5 or top 3 of this 20 ETF portfolio, you would have made 25% (top 5 methodology) or 18.5% (top 3 methodology).

At the time, the prospect of higher energy prices appeared to be driven by inflationary pressures, a potentially weaker dollar, seasonal demand for heating fuel in and the usual arguments surrounding Peak Oil.

This was not an isolated incident. In the Fidelity Equity Portfolio, the Energy (FSENX) and Natural Resources (FNARX) funds both jumped into the Top 3 on the December 7th reading, Vanguard’s VGENX the following week, and the S&P Global Energy Index (IXC) popped into the top 3 of the Seeking Alpha Portfolio in the first week of January. The Russian ETF (RSX) which is heavily weighted with Oil and Gas producers has been lurking near the top of its respective portfolios for a while now.

The reason we mention this is not to tout the Fund King System as some sort of crystal ball that was somehow able to read the fate of North African and Middle East dictatorships and monarchies in the late November/early December price action. What we would like to point out is that the seeds for higher energy prices were already planted in the market place when the proverbial “Arab Street” decided to actually pitch tents out on the street. Therefore, even though the rebels in Benghazi are determined to keep the oil flowing and Saudi Arabia has pledged to boost production to make up for any shortfalls in Libyan deliveries, a quick resolution to the protests and revolutions may not solve the underlying market dynamics.

Watch the trends

Therefore, the time to take your trade off may not be the one or two day dip in oil once the Mainstream Media loses interest in the story. The price of energy may be closely related to the inflationary pressure we are also seeing in the agricultural space (DBA, for example). If that is the case, the stronger consumer confidence numbers combined with a massive arsenal of reserves ready to be written into sizzling fast credit expansion may be what is driving investor assets into the energy sector.

What about Gold and Silver?

Silver has had a burst of activity in the last two weeks. SLV closed just over $30 at the end of 2010 and then languished below the $30 line for most of January and the first half of February. Gold, by comparison, has risen much more modestly. Part of the reason is a rerating of the Gold/Silver parity level. In a previous post, we worked through that relationship a bit. But the other factor is that Silver is much more of an industrial metal than Gold. The relative strength of Silver could be a confirming indicator on the more positive numbers coming out of the US.

What else looks good?

To round out the list, US small caps (IWC, VB), mid-caps (IWM,MDY) and Technology (PRGTX), are ranking highly across the portfolios that we watch. The shift from emerging markets to developed markets followed the usual seasonal patterns (ie. January Effect) but there may be more behind the shift in market sentiment. If the gap between developed and emerging markets (particularly Asia) continues to grow in the coming month or two, we will want to watch for a shift back towards Emerging Markets in the mid to late Spring.

What does this mean for investors?

While there are plenty of dark clouds on the horizon and no doubt a number of hot issues that could flare up to spook investors, the market seems to be pointing to stronger economic performance in the coming few quarters. There is nothing wrong with stashing a few gold bars into the safe deposit box but looking at the current readings across the portfolios, one should be looking to maintain and add to selective risk positions.

Seeking Alpha Portfolio

SA Portfolio RankingThis week the portfolio fell 0.94% with EWT the biggest drag on performance. Over the last 15 weeks, we are still looking at a loss of 1.17% (which does include all commissions and other fees).

There were no changes in the ranking this week so there will be no trading on this Monday.

The only thing I am a bit concerned about is the weakness of Taiwan. After breaching the 9,000 mark on the TWSE Index (^TWII on Yahoo Finance) the market has been very soggy. Although first quarter is traditionally a slow period, the system was indicating that this year would be different and a number of sources appeared to confirm that US Corporates were looking to increase their IT budgets significantly this year.

We will continue to watch this closely as it could impact the Technology investments that are ranked highly in several other portfolios.

Disclosure: I own shares in several of the investments discussed in this post (FSENX, FNARX, IXC, DBA and SLV) which I hold by employing the Fund King System across two portfolio universes.


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