Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

HUI Gold Bugs Index – Big Picture Monthly View

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NFTRH175 took an extensive look at the HUI, ranging from a 15 minute (in-day, in-week) short-term management chart to a daily chart, a weekly chart and finally on out to the biggest – and most compelling of pictures – a this monthly chart.

The nearer time frames generally look okay, with some caveats; notably including the over bought, over loved state for the broad US market.  These time frames must be managed on an ongoing basis, but throughout all of the ups and downs, euphoria and agony, there is and has been the monthly chart and its Cup & Handle target of 1000, which has been active since 2010.

Here is an excerpt of the final segment of the precious metals analysis:

Time again for the HUI monthly chart with Cup & Handle and measured upside target.  To this point we have followed the ‘3 Snowmen (888)’ because I think it is a cute way to keep HUI’s huge upside potential on radar. But the target is actually more like 1000. If you are a gold stock bull – and please don’t take my word for it, NFTRH is just one publication with its own viewpoints, among many and disciplined research should consider many different angles – then you probably find this big picture compelling. You view the Handle consolidation (if that is indeed what this is) as an opportunity to be
positioned for that unknowable time in the future that it may break upward.

An easy way to look at this is to put a mental ‘STOP’ just below the confluence of the Handle, the moving averages and the visual shaded support area. So how about this for a range of perspective on the HUI? 15 minutes all the way up to monthly.

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A Closer Look at the HUI vs. SPX

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Let's dial in the ratio of the HUI Gold Bugs index vs. the S&P 500 that we have been reviewing from a monthly 'big picture' perspective.  This weekly chart is also a big picture, but it adds the 250 week moving average and weekly MACD, along with its slower brother, TRIX, for more definition.

People should realize that while there is significant reason for fundamental optimism about quality companies within the gold stock sector this is, on a pound for pound basis, one of the most aggressively hyped stock sectors on the planet.  The same can be said for gold itself.

Why is this?  I believe it stems from a core and righteous belief by many gold bugs that things are not right with the system (thanks Captain Obvious :-)), gold should be money again (or at least it should anchor the paper of the modern realm) and it is simply a matter of time before destiny is achieved.

Gold, while in a predictable phase of under performance due to the Euro relief and US earnings and temporary 'jobs' pumps, has been beaten back from its impulsive highs during the acute phase of the Euro crisis.  Hype took gold up, and hype is taking it down or more accurately, is causing it to under perform what is now being hyped; namely the salvation of the system as we know it and the ever present tout of conventional stocks.

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Hedging Update — ETFs

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The Chicago Board Options Exchange Market Volatility Index (VIX) dropped 2.39% Thursday, to close at 15.95. The table below shows the costs, as of Thursday's close, of hedging the 20 most actively-traded ETFs against greater-than-20% declines over the next several months, using the optimal puts for that. First, a reminder about why I've used 20% as a decline threshold and what optimal puts mean in this context.

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web, and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance academic to sort through and analyze all of the available puts for your position, scanning for the optimal ones (there's an example of this, with screen shots, in this recent article regarding the last ETF in the table below, TLT).

Decline Thresholds

You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008: 

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Essentially, 20% is a large enough threshold that it reduces the cost of hedging but not so large that it precludes a recovery. When hedging, cost is always a concern, which is where optimal puts come in.

How Costs Are Calculated

To be conservative, Portfolio Armor calculated the costs below based on the ask prices of the optimal put options. In practice, though, an investor may be able to buy some of these put options for less (i.e., at a price between the bid and the ask).

Hedging costs as of Thursday

The data in the table below is as of Thursday's close. The ETFs are listed in order trading volume Thursday, with the most actively-traded name (SPY) at the top.

Symbol

Name

Cost of Protection (as % of position value)

SPY

SPDR S&P 500

1.10%*
IWM iShares Russell 2000 Index 2.25%*
EWJ iShares MSCI Japan 1.78%*
EEM iShares MSCI Emerging Markets 2.25%*
XLF Financial Select Sector SPDR 1.92%*
XLI Industrial Select Sector SPDR 1.85%*
XLE Select Sector SPDR — Energy 2.10%*
EFA iShares MSCI EAFE Index 2.03%*
EWZ iShares MSCI Brazil Index 3.86%*
USO United States Oil 3.52%*
XLK Technology Select Sector SPDR 1.39%*
SMH Semiconductor HOLDRs 2.42%*
XLB Materials Select Sector SPDR 2.66%*
EWT iShares MSCI Taiwan Index 2.61%*
IYR iShares Dow Jones Real Estate 1.92%*
XLU Utilities Select Sector SPDR 0.97%*
XLY Consumer Discretionary SPDR 1.59%*
XLV Health Care Select SPDR 1.11%*
XLP Consumer Staples Select SPDR 0.75%*
TLT iShares Barclays 20+ Yr. Treas. 0.74%*

*Based on optimal puts expiring in January, 2012.

Hedging Update — ETFs

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With weak economic data and renewed risks from the Euro zone, the Chicago Board Options Exchange Market Volatility Index (VIX) ticked up again Thursday to 22.73, its highest level since March. The table below shows the costs, as of Thursday's close, of hedging 18 of the 20 most actively-traded ETFs against greater-than-20% declines over the next several months, using the optimal puts for that. First, a reminder about why I've used 20% as a decline threshold, what optimal puts mean in this context, and a quick note about why there were no optimal puts for 2 of these ETFs.

Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. As University of Maine finance professor Dr. Robert Strong, CFA has noted, picking the most economical puts can be a complicated task. With Portfolio Armor (available on the web, and as an Apple iOS app), you just enter the symbol of the stock or ETF you're looking to hedge, the number of shares you own, and the maximum decline you're willing to risk (your threshold). Then the app uses an algorithm developed by a finance academic to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

You can enter any percentage you like for a threshold when using Portfolio Armor (the higher the percentage though, the greater the chance you will find optimal puts for your position). The idea for a 20% threshold comes, as I've mentioned before, from a comment fund manager John Hussman made in a market commentary in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even … a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Essentially, 20% is a large enough threshold that it reduces the cost of hedging but not so large that it precludes a recovery. When hedging, cost is always a concern, which is where optimal puts come in.

How Costs Are Calculated

To be conservative, Portfolio Armor calculated the costs below based on the ask prices of the optimal put options. In practice, though, an investor may be able to buy some of these put options for less (i.e., at a price between the bid and the ask).

Why There Were No Optimal Puts for VXX and FAZ

In some cases, the cost of protection may be greater than the loss you are looking to hedge against. That was the case with iPath S&P 500 VIX Short-Term (VXX) and the Direxion Daily Financial Bear 3X (FAZ). As of Thursday's close, the cost of protecting against greater-than-20% declines in those stocks over the next several months was itself greater than 20%. Because of that, Portfolio Armor indicated that no optimal contracts were found for them.

Hedging costs as of Thursday

The data in the table below is as of Thursday's close. The ETFs are listed in order of 125-day exponential moving average volume, with the most actively-traded name (SPY) at the top.

Symbol

Name

Cost of Protection (as % of position value)

SPY

SPDR S&P 500

1.64%*
XLF Financial Select Sector SPDR 3.44%*
EEM iShares MSCI Emerging Markets 2.82%*
IWM iShares Russell 2000 Index 2.82%*
QQQ PowerShares QQQ 2.13%*
SLV iShares Silver Trust 7.71%**
EWJ iShares MSCI Japan Index 3.21%*
SDS ProShares UltraShort S&P 500 3.87%*
FAS Direxion Daily Financial Bull 3X No optimal puts at this threshold
XLE Select Sector SPDR — Energy 2.72%*
VXX iPath S&P 500 VIX Short-Term No optimal puts at this threshold
VWO Vanguard Emerging Markets 3.87%*
EFA iShares MSCI EAFE Index 3.72%*
XLI Industrial Select Sector SPDR 2.57%*
FXI iShares FTSE China 25 Index 2.99%**
GLD SPDR Gold Shares 0.40%*
USO United States Oil 4.57%**
EWZ iShares MSCI Brazil Index 3.61%*
XLB Materials Select Sector SPDR 3.12%*
SSO ProShares Ultra S&P 500 7.89%*

*Based on optimal puts expiring in December, 2011.

**Based on optimal puts expiring in January, 2012.