Originally published in the May 2nd 2009 edition of the Financial Post section of the National Post.

On March 21^st, this column commented favourably on Exchange Traded Funds (ETFs) that could benefit from weakness in the U.S. Dollar. The U.S. Dollar weakened significantly relative to other major currencies last week. Favoured Exchange Traded Funds responded accordingly. Since recommended on March 21st, iShares on the S&P 500 Index hedged in Canadian Dollars (XSP) have gained 14.8%, the Claymore Fundamental ETF (CLU) hedged in Canadian Dollars added 18.6%, the Exchange Traded Note on Platinum (PGM) slipped 1.9% and the Claymore Global Metals and Mining ETF (CMW) added 1.9%. Where do they go from here? 

Seasonal Influences

Three of the four ETFs have a period of seasonal strength ending next week. According to Thackray’s 2009 Investor’s Guide, the period of seasonal strength for the Metals and Mining Index is from January 29^th to May 5^th and the period of seasonal strength for the U.S. equity market represented by the S&P 500 Index is from October 28^th to May 6^th.

Platinum has a period of seasonal strength from January 1^st to May 31^st.

The U.S. Dollar has a history of reaching a seasonal peak early in April. Thereafter, it trends lower until the end of December. Seasonal influences appeared earlier than usual this year. The U.S. Dollar Index peaked at 89.62 early in March.

Technical Influences

The S&P 500 Index is showing early technical signs of peaking. Bullish Percent Index for the S&P 500 Index bottomed at 12.8% on March 6^th and peaked two weeks ago at an intermediate overbought level of 66%. Short term momentum indicators (Moving Average Convergence Divergence, Relative Strength Index and Stochastics) for the S&P 500 Index in Canadian Dollars have rolled over from an overbought level. Despite the move by the S&P 500 Index this week above 878 to a new 14 week high, Canadian investors holding U.S. ETFs tracking the S&P 500 Index saw value of their investments decline slightly. Strength in the S&P 500 Index was more than offset by weakness in the U.S. Dollar. The S&P 500 Index in Canadian Dollars peaked two weeks ago. Fortunately, investors holding currency hedged ETFs were protected against the decline.

Technical profile on the Claymore Global Mining ETF is showing early signs of deterioration. Short term momentum indicators have rolled over from an overbought level. Resistance is indicated at $15.36.

Technical profile on the Platinum Exchange Traded Note remains positive. Intermediate trend remains up. Short term momentum indicators are oversold.

Fundamental influences

The U.S. Dollar is expected to remain under pressure until at least late this year. International investors are increasingly reluctant to buy U.S. Treasury bonds issued by the U.S. government to finance its $878 billion economic stimulation program and its $3 trillion budget for 2010 passed last week by Congress. Treasury bonds valued at $101 billion issued last week were successfully distributed, but at a significant cost. Interest rates on long term Treasury bonds rose sharply last week and are likely to continue to rise as the U.S. Government tries to fund the remainder of its programs. Prices on U.S. Treasury bonds broke key support levels and fell to five month lows. The two largest holders of Treasury bonds, Japan and China already have expressed concerns about the flood of new Treasury bond issues coming to market. Persistent weakness in the U.S. Dollar in the second half of 2009 inevitably will lead to additional selling of U.S. bonds and equities by international investors.

What to do?

Several investment strategies make sense:

• Do not own U.S. Treasury bonds with long term maturities
• Do not own U.S. equities and ETFs unless they are currency hedged
• Take seasonal profits on strength in Canadian Dollar hedged iShares on the S&P 500 Index, the Claymore Global Mining ETF and the Canadian Dollar hedged Claymore U.S. Fundamental ETF.
• Hold the Platinum Exchange Traded Note for now with the intention of taking seasonal profits near the end of May.

Don Vialoux, Chartered Market Technician is the author of a free daily report on equity markets, sectors, commodities, equities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca . Mr. Vialoux does not own Exchange Traded Funds mentioned in this report. 

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