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Top Jan. ETF Losers; What Makes Some Screaming Buys?

Posted 02/01/2013 08:02 AM ET

How 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.

GDXJ 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.

David 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 metals."

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 shortfall.

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 production.

• 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 regions.

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.


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