Pay attention!
Even when you are not doing day trading, it is wise to monitor your positions. It is important to go beyond checking quotes and news on your trading screens. Each day, an hour before the market close, we make a careful and systematic review of everything. This includes considering important news events and scheduled earnings reports. With plenty of action overseas and overnight, it is important to bring the right position into the next day's trading.
Our TCA-ETF system helps in this daily review. We currently have a universe of 57 different ETF's representing many sectors and including international exposure. We stick to stocks, since that was the basis for the development of the model. We are selective about including international ETF''s, helping to maintain diversity in our holdings -- always the top group of sectors. We welcome suggestions for addition to the universe.
The change in sector rankings also highlights which ETF's deserve closer monitoring. In short, we view the daily model output as a different and valuable perspective on the market -- newsworthy information that we share once a week on a one-day delayed basis. (For new readers, there is a more complete description of our methods and ratings at the end of the article.)
A World of Negativity
The model captures the overwhelming negative sentiment of the market. Last week we wrote about The Fear Trade. Selling is so broad-based that everything is in decline. Markets normally include a few sectors that defy the broad trend. Not this time.
There is nothing to love. Well, nothing unless you own inverse ETF's. We try to feature a sector each week, but shorting the market is still working, so we refer readers to our recent article, How to Play Short by Going Long. That continues as our best trade.
Regular readers of "A Dash" know that we believe the sentiment to be overdone. We have some deeper studies in mind. Meanwhile, here are a few non-scientific indicators:
- The New York Times collects some Op-Ed contributors on the question of "When Will the Recession be Over? They come up with a pretty gloomy collect, which you should check out for yourself.
- The economic data continues to be dismal, especially the GDP report for 4th quarter 08.
- Anecdotal evidence. At "A Dash" we are not a fan of the anecdote, since it is so subject to abuse. Sometimes the evidence of the individual stories has a pervasive quality.
Differing Perspectives
We note a dramatic difference in perspective between public opinion polling and the stock market. The former has been generally supportive of Obama and the various initiatives. The market has not. (We acknowledge some over-simplification here. We cannot go into depth in each article, and promise to revisit this topic).
A reader has shared the results of a special survey of a group that most would regard as well-off. These are people who can have a significant marginal impact on the market. The reader has graciously allowed be to quote the results on an anonymous basis. It is obviously an unscientific sample, and that is the point. It is a prevailing viewpoint of part of our society, consistent with what many of us have observed.
The average age of investors in
our group is 48. The average invested dollars is 1.2 million. In the last
surveys within our groups the sentiment is just staggering in numbers we have
never seen. Here are some of the latest surveys over the past 4 weeks:
Percentages were actually better in December than they are now:
As of mid-January 2009:
1)
99% believe GM will
declare bankruptcy and the bond holders will be wiped out. This amounts to
billions of dollars lost by pension funds and individual investors.
2)
100% believe
Chrysler will declare bankruptcy and bond holders will be wiped out.
3)
15% believe Ford
will survive
4)
90% believe Ford
bondholders will be forced to accept equity in return for bonds
5)
92% believe gold
will reach 1500.00 within 6 months and 2000.00 within 1 – 2 years
6)
5% believe gold will
retrace to 600.00
7)
75% believe the US
dollar will collapse within 5 years pushing a depressed economy to levels
beyond the great depression
8)
As of last week 82%
believe everyone should hold 40% of their total assets in gold bullion. Not
certificates or shares, but actual gold bullion! No survey we have ever
conducted ever had anyone considering gold bullion.
9)
70% believe GE will
break up.
10)
99% believe GE will
cut its dividend
11)
5% believe the US
economic stimulus will turn the economy around
12)
80% believe BAC and
C will either break up or be nationalized
13)
90% believe US
treasuries are the worst investment to be in right now
14)
72% believe the
S&P will hit 450 within 2 years.
15)
55% believe the
advanced economies are already in a depression
16)
82% believe the
depression will last 7 to 10 years
17)
85% believe
unemployment in the US will reach 28%
18)
88% believe
unemployment is actually higher than being reported by the government
19)
65% reported taking
sleeping aids and/or prescription medications for sleeping
20)
30% believe the UK
will default on its bonds or suspend interest payments and redemptions for a
number of years.
The group is an instant winner on #10. Some other striking results are the 5% believing in the stimulus package and 85% thinking unemployment will reach 28%.
Wow!
President Obama and his economic team have some serious work to do.
Weekly TCA-ETF Rankings
The last of the three inverse ETF's moved into the buy zone during last week, and all of the long positions went into the penalty box. For investors in our weekly program, we made some mid-week adjustments. The market was down 4.5% on the week and we did more than 2% better.
We are not happy with this, of course, since we seek absolute return. Losing less than the market is not the road to riches. The best trading comes when there are some bullish sectors, and now we have none. As a result, we have continued our bearish stance in the Ticker Sense Blogger Sentiment poll. There are only three of 57 sectors in the "buy" range, and they are all inverse ETF's.
Unlike most observers, we think this could change rapidly with a really solid plan for troubled assets or a change in mark-to-market accounting.
Note for New Readers
Our weekly ETF Update is designed to assist both investors and
traders interested in ETF's and Sector Rotation. Before turning to the
current rankings, let us undertake a review for readers new to this
series.
Our Method. In this past article,
we described our basic methodology and why we believe the rankings are
useful for fundamental traders and technical traders alike. While we
urge readers to check out the entire article, the key point is that
ETF's pose challenges and opportunities different from investment in
individual stocks. The fundamentals may be more difficult to assess.
Even with a good grasp on fundamental trends, there is a lot of
technically-based trading in ETF's. This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves. Here is an article on that point.
The system synopsis.
We look at Trending sectors, Cyclical Sectors, and build in an element
of Anticipation for both entry and exit -- thus the name of the model,
TCA-ETF. While we do not reveal the exact methodology for spotting
trends and cycles, the system is not a "black box." The basic elements
are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.
We report the rankings
each week, now on the weekend with a one-day delay, using the Thursday
output from the model. We monitor and trade this daily, and offer a
free report (request via the email address on the top left of the site)
for those interested in our weekly trading program.
