Where to Dig for Value Now

 | Dec 14, 2011 | 3:30 PM EST  | Comments
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Stock quotes in this article:

gld

,

DZZ

,

UUP

,

ZSL

This piece originally appeared earlier today on ETF Profits.

The market continues its decline today as the S&P 500 was down this morning for the fourth time in five days, while the Nasdaq is off for the sixth time in seven trading days. The Nasdaq has lost almost 5% of its value since last Monday's intraday high, continuing the trend since last summer of sharp, fast moves.

Commodity markets are getting hit hard again today, as well, especially in the precious metals arena. The SPDR Gold Trust (GLD) has fallen below its rising 200-day moving average this morning -- never a good sign going forward. The iShares Silver Trust (SLV) gapped down today after recently failing to overtake its falling 50-day moving average. Looking at GLD 's price , it appears that the long-term uptrend for gold prices is over.

GLD
Source: FreeStockCharts.com

This is bad news for gold and silver bulls. In fact, the better trades would be to take the inverse of each of those positions. The PowerShares Deutsche Bank Gold Double Short ETN (DZZ) has clearly broken out to the upside. This ETN is twice inversely leveraged to the price of gold. It was trading at $5.23 this morning and, if it clears near-term resistance at $5.83, it could run up to $7 per share.

DZZ
Source: FreeStockCharts.com

The ProShares UltraShort Silver (ZSL) gapped up this morning and will be challenged by its 200-day moving average at $16.37. ZSL was trading at $15. 42 this morning and it has the potential to trade into $22-to-$24 per share range. ZSL corresponds to twice the inverse price of silver bullion.

ZSL
Source: FreeStockCharts.com

Why have gold and silver been hit so hard lately? It is simply because they are priced in U.S. dollars. With the euro breaking below $1.30, it has fallen to lows not seen since January of this year. The euro is getting walloped because of the fear that European leaders have missed the opportunity to fix their deteriorating situation. A recession may have already started, and deflation will be a bigger concern going forward.

A look at the dollar, using the PowerShares Deutsche Bank US Dollar Index Bullish (UUP) one can see the breakout to new highs. UUP corresponds to long U.S. Dollar Index Futures. It has a near-term price target of $25.15, and traded at $22.68 this morning.

UUP
Source: FreeStockCharts.com

Another negative implication is the inverse correlation of our stock market to the U.S. dollar that has been in place for well over a year. This has not always been the case. In the late 1990s, the U.S. enjoyed a strong dollar and a rising stock market. Logically that's how it should be.

However, with today's weak global economy, a falling dollar has aided American companies by allowing them to be more competitive overseas which, in turn, has helped increase their earnings. We have to hope that the inverse U.S. dollar/stock market correlation changes soon or our stock market may break down from its almost three-year uptrend. Hopefully, our stock market will not follow the same pattern that gold appears to be taking.

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