Successful investors know that opportunities exist around the world. Some of the best performance in 2009 came from non-US investments. While there is a correlation in performance among the various global economies, it is important to consider secular trends in key nations.
Our trading approach takes us in this direction when indicated. Let's review this week's market picture, and then focus on India.
Each week we provide a list of sectors that we expect to have the best performance over the next three weeks. 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. While our ratings share characteristics with momentum and relative strength approaches, there are important differences. 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 model provides a nice feel for the overall potential of the market. It is not the forest nor the individual trees, but something in between. I'll take a look at the macro picture first, and then take a look at our featured sector of the week.
The Macro View
From an overall market viewpoint, our indicators show continued risk. The key elements are as follows:
- 91% of our ETF's in positive territory (up a touch from 84% last week). The median strength rating for the overall list is a plus 32 (up nicely from +21 last week). A score of "0" implies the average long-term ETF expectancy.
- We see continuing reductions in risk, with 58% (down from 66%) 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. It also may indicate the need to take profits in a sector where we have done well, but see higher risk. See our article here for a further explanation of this method. We recently implemented some faster filters, accelerating moves both into and out of the Penalty Box. We are also changing some rules to cut down the frequency of trading.
- Our index package is 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. Despite the positive ratings, we note risk in both directions. All of the index ETF's are in the penalty box.
This overall picture has been about the same for several weeks, but is showing continuing improvement.
The Spotlight on India
Our featured ETF this week is the Invesco PowerShares India Portfolio (PIN).
The PowerShares India Portfolio (Fund) is based on the Indus India Index (Index). The Fund will normally invest at least 90% of its total assets in securities that comprise the Index and ADRs based on the securities in the Index. The Index is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other. The India Index is supervised by an index committee, comprised of representatives of the Index Provider and members of academia specializing in emerging markets.
The fund P/E ratio is about 19.5 and price-to-book is about 3.5. The top three holdings constitute 30% of the fund, but the concentration drops off rapidly after that. Holdings are 25% energy, 18% information technology, and 13% financials.
The model operates from technical criteria, so it is always fun to look at the chart.
The year-over-year performance is excellent, but the sector is still only back to the levels from last autumn. Depending upon your flavor of technical analysis, an advance from current levels might have some room to run before reaching resistance. (I always hate to draw lines for these things, since I do not want to misrepresent the modeling process. The key is that the TCA model likes this chart. While we know the general approach, we can only infer the reasons).
Other ETF Experts
I always take a look at comments from the ETF expert community for additional insight on our highlighted sector. There has been surprisingly little comment on PIN. Michael Johnston at ETFdb has another nice article, this time on the top ETF's from 2009. Here is what he wrote about India.
Not to be outdone by fellow BRIC economies, India turned in an impressive 2009 that saw INP gain 94%. This ETN’s big jump came in May, when the election of the pro-business Indian Natural Congress sent equity markets up 25% in a single session. But Indian equity markets surged throughout the rest of the year as well as the economy resumed its impressive expansion following the global downturn.
A few years ago when I started writing about ETF's I had some very helpful discussions with Mick Weinstein, Seeking Alpha's Editor-in-Chief. In our telephone conversation, he asked some good questions about our model, including what I investigated about the fundamentals. I explained that we always examined the fundamental background for every investment, including trading positions. The reason is that we do not have a "black box" system where the model makes the ultimate choice. I always consider every position, reviewing sector concentration and the factors behind the trade. If something happens, I am prepared to intervene in the trade.
Mick gave some very wise advice. He encouraged me to write about the fundamentals behind each choice. The result: Anyone who follows our weekly ratings also builds up knowledge about each of our featured sectors, one week at a time. Thanks, Mick.
A main theme for investors in India is the presence of human capital and the potential for growth. Here is a nice article on the subject from The Motley Fool.
When comparing India with China, one should also consider the political regime. Here is a good analysis of that subject, also from The Motley Fool, examining the "dictatorship premium."
On the negative side, there is the matter of intellectual property, treated nicely in this article with an emphasis on drug development.
Weekly TCA-ETF Rankings
We gained about 2.7%% last week, compared to 2% for the S&P 500. The model has helped to keep us fully invested at a time when many thought the rally was ending.
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.
As noted above, the macro market indicators are in the penalty box, and most other ETF's are in the penalty box. Based upon the current model signals (and noting the high risk levels), we have continued our bullish posture in the Ticker Sense Blogger Sentiment poll which was not updated this week, probably due to the holidays.
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
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.