Top Jan. ETF Losers; What Makes Some Screaming Buys?
By Trang Ho,
INVESTOR'S BUSINESS DAILY
Posted 02/01/2013 08:02 AM ET
low can an exchange traded fund go? Here's a look at
the ETFs with the biggest declines in January and whether
they're bound to rebound.
Gold Miners Go Dull
Gold miners have been losing luster for the past year
and a half and keep getting duller and duller. Market
Vectors Gold Miners ETF (GDX) melted 10% in January
and Market Vectors Junior Gold Miners ETF (GDXJ) 5%.
They severely undercut SPDR S&P 500 Index ETF's
(SPY) 5% return.
tumbled a whopping 38% from its 52-week peak while
the market chugged to fresh five-year highs.
GDX and GDXJ trade deep below their 50- and 200-day
moving averages, showing a strong downtrend. Their
single-digit IBD Relative Strength Ratings show
they've lagged the price action of more than 90%
of the market in the past 12 months.
Morgan of the Morgan Report, which specializes in precious
metals, believes gold miners will stage a turnaround
this year as gold prices top $2,000 an ounce and silver
$55 an ounce.
Morgan projects the Federal Reserve's third economic
stimulus program will pump $1.14 trillion into the economy
by January 2014. That's nearly double the second round
of quantitative easing (QE2) of $600 billion.
"QE2 ignited a precipitous rally in the precious
metals, pushing silver toward $50 an ounce and gold
toward $2,000 an ounce," Morgan wrote in his most
recent newsletter. "So an additional $1.14 trillion
of stimulus is sure to ignite another rally in precious
In addition, the European Central Bank will likely print
more money to bail out Spain and depress lending rates
to boost economic activity.
The Bank of England and Bank of Japan are also engaging
in aggressive economic stimulus programs. On top of
that, gold and silver will likely experience a short
squeeze, in which traders who sold borrowed shares to
profit from falling prices rush to close their positions
by buying the shares back, thereby lifting demand.
Many gold companies are trading at historically low
valuations, says Tom Winmill, portfolio manager of natural
resources fund Midas. For example, AngloGold (AU) currently
trades eight times earnings, but with 20% estimated
production growth between 2011 and 2014 and annualized
production of 5.4 million ounces.
Traders Sour On Sugar
IPath DJ-UBS Sugar ETN (SGG), tracking sugar futures,
burned off 4% in January.
Morgan Stanley forecasts a global surplus of sugar in
the first quarter, noting that larger-than-expected
output from Brazil could lift supplies even higher.
"Absent broad cane renewal efforts, and increased
Brazilian production still critical for the long-term
global sugar balance, we see longer-term sugar prices
needing to remain at a level that incentivizes farmers
to replant current sugar cane stands and expand acreage,"
Morgan Stanley wrote in a commodities report. "However,
that incentive price still sits well below current prices."
Chinese import demand will likely be low because of
ample stockpiles and a bumper domestic crop. Higher
gasoline prices in the first quarter and increased use
of ethanol (produced from sugar) to blend with gasoline
should boost demand in Brazil in the coming season,
Morgan Stanley added.
SGG trades below both its 50- and 200-day moving averages,
indicating a strong downtrend. Its D IBD Accumulation-Distribution
Rating on an A-to-E scale shows institutional selling
far outweighs buying.
Coffee Drips Ever Lower
IPath DJ-UBS Coffee ETN (JO) and iPath Pure Beta Coffee
ETN (CAFE), which track coffee futures, gained 2%-3%
in January after bouncing off 52-week lows. Commodities
on average rose 4%, according to Morningstar. JO and
CAFE plunged 37% in the past year while agricultural
commodities lost 3%.
Coffee prices have dripped down to long-term price support
levels that historically have attracted buyers, according
to Shawn Hackett, president of Boynton Beach, Fla.-based
Hackett Financial Advisors, which specializes in commodities
trading. He projects there will be a shortage of about
2 million bags in the 2013-14 growing season.
Prices aren't high enough to motivate farmers to increase
planting acreage to meet growing Asian demand. And the
next crop cycle is vulnerable to poor weather and disease.
With coffee trading at historically cheap levels, there's
more upside potential than downside.
In an investor presentation, Hackett cited key reasons
the world's three major growing regions face a production
Brazil: The majority of the rapid growth in production
in recent years in Brazil has come from the off-season
crop catching up to the on-season crop. With this process
near completion, the future two-year production growth
will slow markedly.
• The low-lying fruit of increasing tree populations
per acre to grow yields is winding down.
• Future growth in production will need to come more
from acreage expansion. Prices will need to rise high
enough to promote this.
Vietnam: Vietnam has entered a multiyear period of declining/constrained
• With 25% of the current tree population beyond peak
production output, a painful rejuvenation program will
have to take place.
• Most of Vietnam's recent production growth has come
from acreage expansion. That process is transitioning
as the government promotes sustainable farming with
limiting future acreage expansion.
Mexico/Central America: Roya (a coffee leaf rust fungal
disease) has infiltrated a majority of the key growing
JO and CAFE currently both trade below their 50- and
200-day moving averages, indicating a strong downtrend.
They need to break above both moving averages in order
to confirm a new uptrend.