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Facts, Opinions, And Risk Management

Editor’s note: Originally published at tsi-blog.com on August 14, 2015. Commentators on the financial markets often make statements like “it’s a bull market” and “the trend is up” as if these were indisputable facts, but such statements are always opinions. A statement of fact could reasonably be phrased along the lines of “the market was in an upward trend between date X and date Y,” because if a sequence of rising lows and rising highs occurred between two dates then the trend was, by definition, up during that period. However, it is impossible to know the direction of a market’s current price trend with absolute certainty, let alone the direction of its future price trend. The reason is that even if a market has just made a new high/low, there will be some chance that this will turn out to be the ultimate high/low. For example, it’s a fact that gold was in a bear market in US$ terms from its peak in September of 2011 through to 24th July 2015 (when it hit a 4-year low of $1072), but it is a matter of opinion as to whether gold is now in a bear market. The bear market could obviously still be in progress, but there is also a possibility that it ended on 24th July 2015. At the time of writing, nobody knows for sure. Some market participants and commentators will draw a line on a chart and then make a statement such as “I will consider the trend to be up (or down) unless the market proves otherwise by moving below (or above) my line”. Fine, but there’s a big difference between claiming to know the direction of the price trend and working under the assumption that the trend is in a particular direction unless/until proven otherwise by some predetermined event. The valley of shattered financial dreams is littered with traders who were determined to stay ‘long’ or ‘short’ because they thought they KNEW the direction of the price trend. The impossibility of knowing whether a bull/bear market or an up/down trend is going to continue, or even whether the market is currently in bull or bear mode, makes risk management essential. Someone who knew the future would never have to bother with risk management; they could, instead, risk everything on a particular outcome because for them it wouldn’t be a risk at all. But ordinary mortals always face a degree of uncertainty when making investment decisions and, as a result, always need to face the reality that these decisions could prove to be wrong. Be wary, then, of advisors who claim that there is only one possible direction for the future price of an investment. But while unwillingness to acknowledge the possibility of being wrong is a defect in the approach of some investors, other investors suffer from the opposite problem in that they have a hard time maintaining a bullish or bearish view unless that view is continually being validated by the price action. That is, they are incapable of remaining confident in any opinion that doesn’t happen to conform to the current opinion of the manic-depressive mob. As a result, they routinely get ‘sucked in’ following large price rises and ‘blown out’ following large price declines, as opposed to taking advantage of the mob’s proclivity to be wrong. Therefore, as investors, the challenge we all face is to strike a balance between staying the course in rough weather and preparing ourselves for the possibility that there could be unseen rocks up ahead.

Biotech Boom Over? 3 Health Care ETFs To Invest In Instead

The hot and the soaring biotechnology corner of the broad U.S. health care market endured a steep correction last week. In any case the space has long been guilty of overvaluation, with even the Fed chair Yellen pointing to it last year. But investors seemed unaffected as the largest biotech ETF, iShares Nasdaq Biotechnology (NASDAQ: IBB ), added over 22% this year and gained about 50% in the last one-year time frame. However, the bubble had to burst sometime and last week we heard a loud popping noise. IBB was off about 4% and also saw about $522 million in asset outflow last week, per etf.com . Other biotech ETFs also witnessed a sharp sell-off with BioShares Biotechnology Clinical Trials Fund (NASDAQ: BBC ) shedding about 7.5%, Medical Breakthroughs ETF (NYSEARCA: SBIO ) losing 6.2% and SPDR S&P Biotech ETF (NYSEARCA: XBI ) retreating 6%. Though this does not push the biotech space in an outright bear territory, as the area is full of possibilities, investors can take a look at some health care ETFs that bypassed last week’s biotech sell-off. After all, the sector has no dearth of drivers. The merger and acquisition frenzy, encouraging industry fundamentals, promising new drugs, growing demand in emerging markets, ever-increasing health care spending and Obama care play major roles to make it a lucrative bet for the long term. These health care ETFs are all Buy-rated and were in positive territory last week overruling the biotech correction; and they could be on watch in the short term, at least until the penchant for biotech investing returns. Investors should note that apart from the trio, the entire health care space was under pressure last week. PowerShares S&P SmallCap Health Care Portfolio (NASDAQ: PSCH ) This ETF delivered spectacular performance in the broad health care world, returning nearly 24% so far this year and was up 1.14% over the last five trading sessions (as of August 10, 2015). The fund offers concentrated exposure to small-cap health care securities. It holds 73 securities in its basket, with each security holding less than 3.93% share. From an industry perspective, about one-third of the portfolio is allotted toward health care equipment and supplies, followed by health care providers and services (28.3%) and pharmaceuticals (15.7%). The ETF has amassed $253 million in asset and trades in lower volume of about 25,000 shares per day, while charging a relatively low fee of 29 bps a year. The fund has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook. SPDR S&P Health Care Services ETF (NYSEARCA: XHS ) This product uses the equal weight methodology by tracking the S&P Health Care Services Select Industry Index. Holding 59 stocks in its basket, each security accounts for less than 2.3% of total assets. This is often an overlooked fund with AUM of $205 million and average daily volume of about 20,000 shares. From an industry look, health care services accounts for over one-third of the portfolio while health care facilities, managed health care and health care distributors have considerable allocation. The product charges 35 bps in annual fees. XHS gained about 1% in the last week and returned 18.3% in the year-to-date time frame. It also has a Zacks ETF Rank #1 with a Medium risk outlook. iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ) This ETF follows the Dow Jones U.S. Select Healthcare Providers Index with exposure to companies that provide health insurance, diagnostics and specialized treatment. In total, the fund holds 51 securities in its basket with major allocations going to United Health and Express Scripts at 12.4% and 7.8%, respectively. Other firms do not hold more than 6.3% of IHF. The fund has been able to manage more than $1 billion in its asset base while volume is moderate at about 84,000 shares per day on average. It charges 43 bps in annual fees and expenses. The Zacks ETF Rank #1 fund added 0.3% in the last week, while it is up over 18% so far this year. Original Post

Gold Demand Drops 12%, Hurts SPDR Gold Trust ETF

The SPDR Gold Trust ETF (NYSEARCA: GLD ) had a nice bump yesterday after the index closed with gains of 1.40% at $107.75. The gains contrast sharply with weak global demand for gold in the second quarter and it is unlikely that the ETF will keep yesterday’s gain in today’s session. CNBC reports that the global demand for gold has dropped to a 6-year low as buyers in China and India reduce their bullion purchases. A report released by the World Gold Council (WGC) this morning provided insight into the demand for the yellow metal. It was reported that the overall demand for bullion in the second quarter came in at 915 tons to mark a 12% year-over-year decrease. The low global demand for gold in Asia echoes earlier fears that the devaluation of the Chinese Yuan might be bad for Gold and Direxion Shares Exchange Traded Fund Trust. Demand for gold is weak in Asia Asians ( especially in India and China ) are buying less gold as the demand drops from 1,038 tons last year to 915 tons this year. The price of the yellow metal has plummeted more than 40% in the last four years from $1,920.94 a troy ounce in September 2011 to a narrow $1,200 to $1,230-per-ounce range during the April to June period. In fact, prices are already down 3% this quarter. Alistair Hewitt, head of market intelligence at the WGC says, “It’s been a challenging market for gold this quarter, particularly in Asia, on the back of falls in India and China.” The drop in the demand reflects the 14% decline in demand for gold jewelry from 594.5 tons in Q2 2014 to 513.5 ton in Q2 2015. It might interest you to know that gold jewelry holds 60% of the global gold consumption. A rough road ahead for gold ETFs GLD might start feeling the pinch of the poor demand for gold. For instance, Direxion Shares Exchange Traded Fund Trust was down 4.43% in pre-market trading to $4.53 and yesterday’s gains might be lost when the market opens and gold investors read that the demand for gold has slumped . However, the weak demand for the yellow metal and falling bullion prices might send the ETF up if the market believes that demand will increase in the second half of the year. If there’s a prospect for increased demand for gold in the second half of 2015, the yellow metal will find support , bargain-hunters will start buying and bullion-backed ETFs, like GLD, might not need to worry much about the drop in demand. Hewitt at WGC believes that the low demand coupled with the devaluation of the Yuan might support the bullish thesis for the yellow metal. In his words, “we often see people turning towards gold when threatened by weak currencies and I think that’s clearly the situation we’ve seen in China over the past few days”. Link to the original post on Learn Bonds Share this article with a colleague