Portfolio Review: Cash & Commodities Still King

March 13, 2008

Technical and fundamental indicators still tell this portfolio manager that patience will be rewarded despite current market conditions.

Jerry Slusiewicz doesn't like cash. But the Newport Beach, Calif.-based advisor and portfolio manager says he likes current market conditions even less.

The founder of Pacific Financial Planners says it's a little early to dive back into stocks. "The market is still oversold, which leaves a lot of upside potential," said Slusiewicz.

He considers both technical and fundamental factors before investing. Despite the biggest rise in five years in the Dow Jones Industrial Average index on Tuesday, Slusiewicz is waiting for a confirmation that the current rally has legs.

But prior to that, he notes that the market was down seven out of the last eight days. "So the rally is just starting," Slusiewicz said. "On Wednesday, the major indexes were whipsawed. But on Thursday, we started way down and closed up."

He'd like to see markets show a definite follow through. For example, SPDRs (AMEX: SPY) would need to get above $136 per share. It closed at $131.76 on Thursday. "That's the minimum level we'd feel comfortable with before re-applying cash into the markets," Slusiewicz said.

No matter how fast stocks recover, he says taking a disciplined and well-planned approach is important. "We're sitting on 60% cash, so we're going to wade into the market, probably a third at a time," Slusiewicz said.

All-Clear Signal

Based on technical analysis, he pinpoints $140 per share as the next attractive buy point for SPY. The third pricing level would be at $146. "That would signal SPY's all-clear," Slusiewicz said. "At that point, it'd be above the downtrend line that started on Oct. 11, 2007, which was basically at the peak of the market."

From the high point in October 2007 of 1576 on the S&P 500, the index fell nearly 20% through the end of last summer. "Everything at this stage revolves around credit and the ongoing financial crisis," Slusiewicz said.

But broad stock indexes remain above their 52-week lows. "The sentiment indicators suggest that stocks remain oversold," Slusiewicz said. "But while it's important to note, those are secondary indicators. So even though we're hopeful that not much downside remains in the market, we're not ready to bet the farm yet."

Besides cash, he's mainly investing in commodities. His biggest holding right now is streetTracks Gold Shares (NYSE: GLD). It hit an all-time high on Thursday and has run up 45% since Sept. 6, 2007. That's when GLD broke out at $68 per share, says Slusiewicz.

"With a gap up today, that's another positive sign," he said. "But I'm concerned that GLD could be poised for a pullback."

The ETF is trading 25% above its 200-day moving average. Gold has also breached the psychologically important $1,000-per-ounce level. "When it hits that level, people might want to take money off the table," Slusiewicz said.

But technically, GLD has minor support at $90 per share and major support at $80 a share, he adds. "So that's where if the rally fizzles, that's where it could fall," Slusiewicz said.

While he still thinks prospects for GLD remain strong long term, he observes that the last time the ETF underwent price consolidation, that pullback lasted 16 months. "So gold's rise hasn't been straight up," Slusiewicz said.

Although he isn't ready to trim his GLD positions, Slusiewicz has put stop-loss orders on GLD at $90.50.

He also owns SPDR S&P Metals & Mining ETF (AMEX: XME). "The global markets are still in a growth phase, and steel and copper haven't slowed either yet," Slusiewicz. "Pretty much anything you pull out of the ground these days is seeing strong demand."

Energy Disconnect

He also holds SPDR S&P Oil & Gas Equipment & Services (AMEX: XES). "It's interesting to see energy prices hitting new highs, but the energy stocks aren't," Slusiewicz said.

But equipment makers should do better long term than diversified oil producers, he added. "At these high prices, looking for alternatives and to dig deeper becomes more affordable," said Slusiewicz. "The money flow's going to continue to create more supply of oil."

He also recently added to his positions in iShares Lehman TIPS Bond (NYSE: TIP). Slusiewicz entered the ETF in October at $101.80 per share. It closed at $110.78 on Thursday. And it's paying about a 4.8% yield.

"We're importing inflation. The falling value of the dollar means it costs us more money to import goods and services," Slusiewicz said. "And I don't see that changing much."

TIP had a breakout on Feb. 28 at $109.40 per share on strong volume. It's up to around $110 now. Slusiewicz says its support is at $105 per share. "So we could see a pullback, but unlike GLD, that could fall to $80; TIP probably isn't positioned technically to fall that much," he said.

With tax rebates coming in May and the Fed likely dropping interest rates on Tuesday, Slusiewicz says a bottom in the broad stock market indexes appears close. "But right now, it pays to be patient," he said. "Very soon, we're expecting to see a rally that could push stocks 16%-20% higher over an extended period."

Find your next ETF

Reset All