Trade of the Day: iShares Gold ETF (IAU)

Stocks fell on Monday in light, quiet trading, unprompted by any major catalysts. Oil was lower again, which set nerves on edge about diminished industrial demand. But even that was offset by excitement over new merger activity in health care, and renewed hopefulness that eurozone policy makers are closer to starting a continental version of quantitative easing.

The most salient news event today was the start of fourth-quarter earnings reporting season, which aluminum giant Alcoa Inc (AA) kicked off in high gear. After hours, it reported a pretty good number and shares stiffed for a 1.5% gain as dusk settled over its hometown of Pittsburgh.

Expectations for the S&P 500’s earnings growth rate is only 1.1% according to the data whizzes at FactSet, which compares to expectations of +8.4% at the start of the quarter last year — and well below the three-year average of 5.4%. The biggest reason for the plotz in expectations is the stunning plunge of oil prices, which is on track to smash energy companies’ earnings by as much as 19%.

Personally, I always like to see the expectations down because it makes it so much easier for savvy companies’ executives to beat the number and raise guidance. It’s a game, yes it is, but it’s one that everyone has agreed to play. You just have to hope there wasn’t a secret meeting to change the rules while you were on winter break.

Trade of the Day: iShares Gold Trust (ETF) (IAU)The Financial Times reported that U.S. interest rate traders are betting that the decline in oil, falling inflation, weak wage growth and stronger U.S. dollar will delay the Fed’s first rate hike beyond the mid-2015 timeframe that is currently in focus. The report reinforces accounts from last week that the mixed December employment report will allow the Fed to stay patient on liftoff. That should be supportive of higher stock prices.

Today I’m recommending a bullish trade on one of the strongest groups in the past few sessions: gold stocks. Gold had a terrible run in 2014, but the commodity has a consistent habit of reversing its direction at the start of the calendar year. In 2014, it turned on a dime when the calendar pages flipped, and shot higher for three months. Could happen again.

Trade of the Day: iShares Gold Trust (ETF) (IAU)iShares Gold Trust (ETF) (IAU) is an exchange-traded fund that tracks gold futures prices. Due to the recent flat spot, the implied volatility is low, and I expect IAU to at least trade up to the top of its descending channel. Shares jumped 1% on Monday, and this trade is looking really good.

Buy IAU at current levels (around $11.90) for target $12.75. Set a stop at $11.78, good till canceled.

Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.

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