The SPDR S&P Metals & Mining ETF (ticker: XME) created a near term peak at just over $50/share on September 17th, 2009. It’s risen from $20.55 on March 2, 2009 for an incredible gain of 143% over a six month period. We initially bought this fund for three of our models on April 27th and have enjoyed the ride higher as it has been our best performing holding since then. Recently, this position has also provided us with a very important look into overbought market conditions.
At Pinnacle, we utilize a rebalancing software tool called iRebal to streamline our trading process. To avoid boring every reader I’ll stick with the point at hand and not dive into the overly complicated world in which I live using this tool. iRebal uses band thresholds, which is a fancy term for how it determines when to rebalance a security after periods of either under or out performance. For example, if our model position size is 3%, iRebal will signal that a rebalancing trade is necessary if market movements cause the position to change by 1% or more from its intended target, in either direction. In this case, thanks to outsized gains since our purchase, XME was rebalanced (sold) back down to its target for a majority of our client portfolios – right at the short term peak on September 17th!
It is hard to be this exact when monitoring overbought conditions but this does give us one more tool in evaluating market conditions. Materials, and especially Metals & Mining stocks, have been a leader since the market bottom in March. As Rick Vollaro recently wrote, we could see a short term correction here as the market catches its breath. The recent rebalancing trades in Metals & Mining might be an important clue that a broader correction is developing, because when market leaders pause or begin to correct after a strong move like the one we’ve seen, the rest of the market often follows.
