The equity markets are moving away from risk, and ever since
traders turned their attention from the election to more
significant unknowns, the de-risk trade has been in full effect.
This is true of the equity markets at large, but it's especially
true of many stalwart "safe" high-yield sectors such as
But why have high-yield funds suffered the wrath of sellers?
Well, now that President Barack Obama has won a second term,
there is very real fear thattaxes on the wealthy, and particularly
taxes ondividend income, will go up. The so-called "fiscal cliff"
negotiations have yet to begin, but the president already has said
that a deal must include an increase on the wealthiest 2% of
Americans. If you take out your "politico-speak" translator, what
this really means is the likelihood of a jump in tax rates,
including a big increase in the dividendtax rate from the current
15% to nearly 40%.
The likelihood of such a tax surge is in part the driving force
behind many a high-yield fund sell-off during the past week, but in
my view, the level ofpanic selling in some funds means a very
attractive buying opportunity.
One high-yield fund I am particularly fond of is the
Gabelli Global Gold,
Natural Resources & Income Trust (
. This is a closed-end fund that invests in companies in the gold
mining industry, including industry stalwarts such as
Barrick Gold (
Newmont Mining (
, to name some of the fund's top holdings.
What makes this fund unique, and what gives it a very attractive
income stream, is the strategy employed by management. This
involves the writing (selling) ofcovered call options on the equity
securities in its portfolio. The strategy has resulted in the
fund's ability to generate about a 12%yield , and along with the
potentially huge upside in metals and mining stocks the sector is
capable of, makes GGN a compelling high-yield gold play fit for
both income investors -- and now especially for traders.
The reason this fund is fit for traders can be seen with one
glance at the chart. GGNshares have plunged more than 12% in just
the past week. That decline is no doubt due to the fear of higher
dividend taxes, but it's also due to what's been called the "panic
My friend and colleague, Doug Fabian, editor of the Successful
Investing and High Monthly Income newsletters, describes this cycle
"The panicinvestment cycle is a migration in emotion from
optimism to excitement, then thrill, and then virtual euphoria
about how well things are going. Unfortunately, in the absence of
the proper risk management tools, this emotion usually morphs
into anxiety once an investment begins to break down. That
anxiety then becomes denial, and it is at this point that the
fear factor invades. Soon after the fear comes the panic selling,
and it is at thiscapitulation point, when nearly everyone is
despondent, that the real opportunity for income investors
I suspect that we are very near this point in GGN, especially
with this natural resources fund at multi-year lows. Smart traders
can buy into this panicprofit opportunity now, before the fiscal
cliff and tax issues are resolved. Because even if there is a
marked tax increase on dividend income, the beaten-down price of
GGN means getting in on this fund during the fear portion of the
panic cycle -- and that's nearly always a winning trade.
Action to Take -->
Buy GGN at themarket . Set stop-loss at $11.34. Set initialprice
target at $14.50, just above the200-day moving average , for a
potential 18% gain in two months.
This article originally appeared on TradingAuthority.com:
Panic Selling in High-Yield Fund Could Allow You
to Bank Double-Digits