My System Loves This Shunned Sector Right Now

StreetAuthority Network

Investors are often told that the best time to buy is when everyone seems to be excessively negative on a sector or a country. That was certainly true in 2013 for investors who were able to trade in the sovereign debt of Greece.

Investors enjoyed a gain of 47% on Greek government debt last year even as fears of Greek default lingered throughout the year and the economic news remained mostly negative.

Of course, most individual investors couldn't actually invest directly in Greek bonds, and returns from investments that were available to individual investors were significantly lower. For example, the Global X FTSE Greece 20 ETF (NYSE: GREK) gained 25% in 2013, less than U.S. stocks -- even though Greek stocks should have benefited from the same factors that drove Greek bonds higher. 

Given the higher risk Greek stocks provided, buying when the news was negative in early 2013 doesn't seem to have been a wise investment for most individuals.

The example of Greece illustrates some problems with the idea of buying bad news -- there is no way to know when the news is bad enough to drive big gains, and there is no way to be sure the market will respond in a positive way.

[More from StreetAuthority.com: Is It Time To Prepare For The Worst?]

Rather than relying on impossible-to-define indicators like news and sentiment, I developed the 26-week rate of change (ROC) system to find buying opportunities. Sometimes the system will give a buy signal when the news is bad, like it is this week in the metals sector. My system is signaling the SPDR S&P Metals & Mining ETF (NYSE: XME) is a "buy."

Gold and other metals suffered large losses last year, and sentiment in those markets is negative. Recent headlines show that many analysts expect even lower prices this year. Goldman Sachs expects gold prices to fall at least another 10% a year, and gold bull John Paulson (who made billions betting subprime mortgages would collapse) recently said he would no longer personally be buying gold for now.

XME has been moving higher on the bad news and is now about 30% above the lows set in June. ROC has turned positive, and although the indicator pulled back in the past week, it is still bullish.

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[More from StreetAuthority.com: This Strategy Has Worked For 212 Years... And Counting]

XME's largest holdings include miners like Freeport-McMoRan Copper & Gold (NYSE: FCX) and Hecla Mining (NYSE: HL). The exchange-traded fund also holds aluminum producer Alcoa (NYSE: AA) and AK Steel (NYSE: AKS), a company that makes steel and stainless steel for the automotive, appliance, construction and manufacturing markets.

With diversified holdings in the metals sector, XME is not a traditional mining play, and it is not a pure gold trade. But it is possibly an early indicator that the metals sector is finally turning bullish. This ETF also provides investors with the opportunity to profit from growth in steel and auto manufacturing while waiting for a turnaround in gold and silver.

Action to Take --> There are no other changes in the model portfolio this week. After adding XME to the portfolio, the system will be fully invested and holding ETFs in all five asset classes.

[More from StreetAuthority.com: Indicator Points To Trouble For Stocks, Gains For Gold]

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This article was originally published at ProfitableTrading.com: 
My System is Signaling This Unloved Sector is a 'Buy'

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