Despite continuing skepticism, the market continues to move higher during what many argued was the season of danger. Those following "calendar rules" advised investors to sell in May, to sell in September, and to sell in October. In a couple of weeks we will be out of the danger period. It will be interesting to see if the calendar adherents stick to their method. If they do, we should see fresh buy recommendations from some unlikely sources.
Here at "A Dash" our indicators are only mildly bullish, but there are specific sectors worth consideration. Emerging market ETF's make up most of the portfolio, but there are also other choices.
Our Approach
We let the system be our guide.
We study sectors continually, looking at the charts and ratings for hundreds of ETF's. Each week we provide a list of our top-rated sectors for the next three weeks, along with some of our current observations. ETF investors can check out the list and compare our findings with their own conclusions.
In our analysis, we consider Trends, Cycles, and a bit of Anticipation. Since we apply the model to nearly 300 ETF's, we call it the TCA-ETF system. (For new readers, there is a more complete description of our methods at the end of the article. We also have a free report with more detail on the system and results, available on request.)
The Macro View
From an overall market viewpoint, our indicators continue in positive territory, although it is a close call. The key elements are as follows:
- We now find 94% of our ETF's in positive territory (95% last week). The median strength rating for the overall list is 25. We are changing from mean to median strength in our weekly reports, because the median is a more helpful and robust measure. (A score of "0" implies the average long-term ETF expectancy.)
- 75% (down from 95%) of our sectors are in the "penalty box." This means that they are currently disqualified from the buy list for technical reasons. You can think of this as a sophisticated "stop loss" rule, often applied in advance.
- Our index package remains slightly positive. For this rating we look at the ETF's (both long and short) for the S&P 500, the Dow, and the Nasdaq. You can see these ratings is the results table for this week.
Focus on Banks -- Comparing the Choices
There are many financial ETF's, but let us take three as the focus for this week.
SPDR KBW Regional Banking ETF (KRE) has a roughly equal weighting of many banks. The P/E ratio is about 22 and the price-to-book is .76. Yield is about 4.5%. Here is the chart.
SPDR KBW Bank ETF (KBE) emphasizes larger banks with the top ten constituting 60% of the fund. The yield is much lower at 2.1%, while the other ratios are similar to KRE. Here is the chart.
emphasizes regional banks, differing from KRE, but has more emphasis on capitalization. The top ten make up 60% of the fund. Yield is only 1.4%, P/E is about 25, and price-to-book is 1.25. Here is the chart.
Making a Choice
While all three choices are banking ETF's, there are obviously some major differences. The pundits take quite different perspectives.
David Kotok, writing at The Big Picture compares two of our focus ETF's as well as some others. His recommendation is for KCE, not really a bank group, so readers should check out the entire article. Here is his comment on KBE versus KRE:
Contrast KBE with KRE. It is the exchange-traded fund composed of regional banks that have not been deemed “too big to fail” by the Washington-based troika of Treasury, Fed, and White House/Congress. Many regional banks are small enough to be resolved by the FDIC, and many suffer from a greater concentration of deteriorating commercial loans than their larger brethren. Their status is reflected in the performance of their stocks. KRE has had a total return of only 49% since March 9. It has actually lagged the performance of the S&P 500 index, represented by the “Spider.” SPY has had a total return since March 9 of 59%.
Michael Johnston at ETF Database hits the highlights in the comparison between IAT and KRE:
The most significant difference between IAT and KRE is the weighting methodologies employed by the underlying indexes. IAT tracks the Dow Jones U.S. Select Regional Banks Index, a market capitalization-weighted benchmark. KRE tracks the KBW Regional Banking Index, an equal-weighted benchmark. As such, a handful of companies make up a significant portion of IAT’s holdings, while KRE is more diversified across more than 50 different regional banks and thrifts. IAT’s largest holding, US Bancorp, makes up almost 17% of its holdings, while KRE’s largest individual holding is less than 3% of assets.
KRE also has a much lower price/book ratio than IAT. Price-to-book is an important metric in valuing banks, particularly in an environment where many asset bases have been eroded by writedowns of mortgages and commercial property loans.
Our own choice is KRE. The model is very sensitive to risk and reward, and looks ahead three weeks. Both of the other choices are currently in our penalty box. Investors with other objectives and time frames might well reach different conclusions.
Weekly TCA-ETF Rankings
We had a small gain last week, about one percent behind the S&P 500. Our current holdings are not near the top in strength rank, but they still have good ratings. Our testing has shown what Vince calls "robust" results for anything with a positive strength rating. We do not buy ETF's in the penalty box or those with poor liquidity. We provide these ratings as information for readers who may not trade as frequently as we do. Those signing up for our free weekly email update can also get the entire list.
[We also note that three weeks ago we implemented what our modeling guru, Vince Castelli, calls an improved filter. While the underlying model has not changed, the inputs used reflect our best efforts to improve the signal-to-noise ratio. We have advanced the timing (the Anticipation factor) reflecting the recent "hot money" tendencies in ETF's. This means earlier recognition and also faster moves to the penalty box. Those tracking our entire data series should keep this in mind.]
As noted above, all of the macro market indicators remain positive, although most ETF's are in the penalty box. Based upon the current model signals, we have maintained (by a whisker) our bullish position in the Ticker Sense Blogger Sentiment poll.
Here are the top sectors from our expanded universe of 280 ETF's. The list also includes the values for the broad market ETF's and their inverses.
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.
