Each week we use our ETF rankings to gain insight into current market trends and potential turning points. While we look at model output at least twice a day, trading as necessary, the weekly assessment is a good time interval to consider sector moves.
The approach combines trends and turning points derived from cycle analysis. (The complete current rankings are at the end of the article, along with an explanation of our methodology).
This week there are three interesting themes.
- Financial sectors, after more than a month in the limelight, have dropped out of our top eight sectors. While the ratings are still in the "buy" zone, we hold only the top eight for the daily program and the top six for weekly programs.
- Commercial REIT's (ICF and IYR) and homebuilders (ITB) remain at the top. There are many stories about REIT refinancing difficulties. We covered this carefully two weeks ago. The strong players, heavily represented in the ETF, are buying cheap assets. It is a complex story.
- Nuclear Energy's strong move from #27 to # 6 in our rankings. We have not featured this sector for almost a year, so it will be today's focus.
We trade nuclear energy based upon the Van Eck Market Vectors Nuclear Energy ETF (NLR). As they note, "The Nuclear Energy ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal® Nuclear Energy Index." Restricting holdings to companies with a market cap over $150 M, the index covers seven different nuclear sub-sectors.
The top five holdings make up 40% of the fund and the top ten are 65%. 84% of the fund is related to mining, nuclear generation, or infra-structure. US holdings make up only 25%. The beta is 1.18, but the correlation with the overall market is only .64. Finally, the P/E ratio is about 17, pretty reasonable for this type of sector.
Here is what the model sees:
There has been a long period of basing and a break past the recent high. To consider possible targets, let us look to some other voices.
Brett Steenbarger also does a valuable weekly sector update. His themes are a bit broader than ours, but always worth reading. Like us, he notes the weakness of financials and some relative strength in energy.
Tom Lydon cites the key problem for the nuclear industry: cost. The lead time is long. If we only get interested in nuclear when fossil fuel prices are high, nothing will get done. Read the entire article to see his charts and alternative nuclear plays.
Trends I'm Watching reports the move in NLR. Readers wanting another list of recent movers for comparison may find this interesting.
Paul Ausick notes that Obama Administration policy is crucial, along with energy prices, if nuclear is to make a move.
Weekly TCA-ETF Rankings
our 57 sectors are in the
"buy" range. Several sectors still have extremely strong ratings. The overall picture is slightly weaker than it has been for the last several weeks, but we remain fully invested.
It was a bad week for the system, breaking a nice winning streak. We lost a little over 1% while the market gained over 1%, for a net loss of 2.5% against our benchmark.
Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.
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
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.