A Dash of Insight

Weighing the Week Ahead: The Dual Theme Continues

It is almost as if the news came from two different worlds.  First, there is Europe.  Colin Barr (one of our featured sources, now writing more fine articles than ever in an expanded role) explains why you should not "sweat Europe". His article cites several good sources explaining why there will be an eventual solution and contrasting this with the failure to recognize solid domestic news.  Regular readers will recognize these themes from my work of the past month, but it is nice to have Colin and his sources in my camp.  Please read the entire article.

By contrast, the focus of interest for policymakers and for the "attentive public" has already moved to new subjects.  As an investment manager it goes with the territory to know what is going on.  I want to know what is happening and what might happen next.

I have had a number of questions about what I read and how I decide what to follow.  I attempted a summary for today's WWA piece, but I quickly realized that it is too complicated.  I read too many different sources, each providing something valuable.

For the moment I am going to make a  broad generalization about a duality:

1. The "real world"  has moved on from the European debate.  You can look at any MSM source from this weekend to discover the top concerns.  There is an understanding that the story is going to play out over a matter of many months.
2. By contrast, the financial world has a complete fixation on Greece, Spain, and Portugal.  There is a tick-by-tick following on CNBC, with special commentary from tea party hero Rick Santelli.  Every trading floor is focused on comparing European countries with failed US investment banks.

Is Greece the next Bear Stearns?  Is Spain the next Lehman?  These are the questions emphasized in the financial media.  One of the worst features of CNBC is the penchant for taking a stupid question and posing it to people who could not possibly know the answer.

The very posing of the question biases the entire enterprise and reduces the value of their information for the individual investor.  The problem is that CNBC is catering to their (ever-declining) pool of current viewers and not offering help to the broader audience they desperately need.

This is the reality, and we must recognize it.  I will do my regular analysis from this perspective.  I will start with the "real world" in the analysis of the "good" and the "bad."  We'll look at Europe in the weekly attention to the "Ugly."  But first, a little background.

Background on "Weighing the Week Ahead"

There are many good services that do a complete list of every event for the upcoming week, so that is not my mission.  Instead, I try to single out what will be most important in the coming week.  If I am correct, my theme for the week is what  we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

Last Week's Data

The actual data from last week generally beat expectations .  If you had just been reading the news flow from the US, you would never have predicted the wild swings and negative bias.  Let us take a closer look.

The Good

The economic news hit the right notes for the key indicators.

• Home prices moved higher and sales were much stronger.  Check out Calculated Risk for a good summary.  The general media spin attributed this to the expiration of the homeowner tax credit.  In general I agree that the credit "pulled forward" some buying.  Meanwhile, I know a few people who are buying right now.  I asked why they "missed the credit."  Their explanation was that they could get a good bargain right now -- that sellers were well aware of the credit.  Interpreting these effects is pretty tricky.  Critics of cash for clunkers (including me) were wrong, for example.  Some of the programs are working better than originally expected.
• The sentiment data was pretty good -- at least in line with expectations, but still lower than I need to see for strong job growth.
• The stimulus program helped the economy in Q1.  Only half has been spent so far.  Most people do not realize either of these points, so this contributes to the overall negativity.
• Truck tonnage was up in April.
• Mortgage rates declined yet again.  The rates are close to all-time lows.  This is a complete refutation of the predictions of many that rates would spike in the absence of Fed buying.  I understand that there has been a flight to quality in bonds and the dollar, but let us be fair about this.  There were many highly-publicized pundits who have been wrong about this one. When do they expect the prediction to come true?

The Bad

Some of the economic data were a little soft.

• Initial jobless claims remain elevated at 460,000.  This was down a bit from the prior week, but nowhere close to the level needed for solid net job growth.
• Personal consumption was unchanged.  While levels are much higher than the collapse predicted by many, there is a need for growth.
• The ECRI growth index has declined again.  The ECRI leading indicators are still at a level showing solid growth.  There has been a decline from the post-recession spike.  The ECRI does not see another recession on the horizon, but others are predictably putting a more bearish spin on their data.  We shall see.

The Ugly

The daily trading was ugly, although the net change for the week was not dramatic.  It was all about Europe.

The European story continues to dominate financial markets, even though most have moved on.  Here is the challenge for traders.

The Truth about Europe

A reasonable projection of impact for the US is not that significant, which is why most people have moved on to other challenges in the wake of the responses of the European Union and the IMF.  The New York Times emphasizes this point, which you could also have read on "A Dash" in this article.

Another good approach is to follow actual data.  The TED spread (treasury over eurodollar) was a good indicator of stress in 2008.  While it is slightly above normal levels (38 bps or so) and shows an increase over the month, it is nowhere close to the 350 to 460 bp's of 2008.  This provides little support for those using the domino analogy.

The Rumor Mill

During Wednesday's trading a rally was turned into a major loss because of an article in the FT.  The story was interpreted as an indication that China was going to dump Euro's from their reserve holdings  It was a "scoop" and the impact was dramatic.

Any knowledgeable observer would be skeptical of such a report.  The Chinese have embarked upon a tilt toward more European exposure.  A change in policy, as improbable as that might be,  would be likely to affect future buying, not current holdings.  Most importantly, as net exporters the Chinese are likely to be stocking up on all currencies until and unless they adjust exchange rates.  This is what you should know before trading on this rumor.

The market reacts to headline news, so the rumor-based selling was dramatic.  If you were a trader, you had a chance to pounce on the headline, but you needed to cover before the expected overnight denial.  It all took only a few hours, spread over two trading days.  If you were an individual investor you had to avoid a major blunder.

As expected, the revised FT story came out here.

The conclusion they reached is that "investors were left guessing" about China policy.  Another interpretation would be that their scoop-oriented reporting introduced the uncertainty.  When a story is implausible, why not really nail it down before doing something that generates a big market swing?  The original story had plenty of qualifications and nuance, but no one reads that.

It is like crying "fire" in the theater.  The FT is one of my featured sources, but this needless roller coaster was not good for most investors -- only for very sharp traders.

And finally, Friday's trading saw steep selling from a Fitch downgrade of Spain's credit.  Fitch joined S&P.  Both are concerned about growth prospects given planned austerity.  Presumably they would also have been concerned in the absence of austerity.  Despite the inevitability and predictability of these ratings, they do have an impact for some holders of debt.

Dealing with the European News

The European situation is going to take many months -- perhaps even years -- to unfold. The best thing investors can do is to understand that this is not a replay of 2008.  This article by James Altucher is a good place to start.  You could also review my WWA articles from the last several weeks, all of which covered this theme.

At some point the continued playing of the same song will no longer influence trading, but apparently we are not there yet.  Meanwhile, it is a difficult trading market, featuring both risk and opportunity.

Our Trading Forecast

Our own indicators turned neutral two weeks ago and remain so this week.  That was our vote in the weekly Ticker Sense Blogger Sentiment Poll.   As you can see from the data, the call could easily be a bearish tilt.  It is only the general volatility that suggests a neutral posture.  Here is what we see:

• Only 9% ( 33% last week) of our ETF's have positive ratings.  This is very weak.
• The median strength is only -35 (down dramatically from -5 last week). This is a major negative.
• 100%  (same as last week) of the sectors are in the "penalty box," showing an extremely high level of uncertainty and risk.
• Our Index Package now has a very strong negative rating.

[For more on the penalty box see this article.  For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

For short-term accounts we were neutral.   We currently have no positions.

The Week Ahead

The most important data by far will be the employment situation report on Friday.  Most observers are looking for a big number, but I have my doubts.  I will look to Tuesday's ISM report as the last input for my model and do my regular forecast at mid-week.

Investment Implications

For short-term trading, our three-week time horizon, the models indicate that the uncertainty is just too great.  We have no positions.  This position is a matter of daily review.

For long-term accounts, there are still many attractive stocks.  This is especially true in technology where the upgrade story is intact, and the stocks have declined in the general panic.

I still expect a decline in volatility.  At some point the Europe story will be played out, and it will be back to the interpretation of economic data.  We are still two months away from the next earnings reports.

ETF Update: Back to the Sideline

Sometimes great minds think alike, but often they do not.  In the financial world the leading experts often disagree, especially on specific trades.

Method Matters

Regular readers know that I like to use the sports world for examples, particularly the realm of handicapping.  Let us imagine that we have four different football experts:

• The fundamental football analyst looks at team strengths and weaknesses, injuries, and the matchups he sees on tape;
• The "smart money" analyst looks at the line moves in the market;
• The psychological analyst looks at the schedule to see if this is a "must game" or a possible let down;
• The modeler runs power ratings and makes his own independent prediction.

The very best practitioners of these methods may all be winners.  On a specific forecast, they may disagree.

So it is with investments.  There are many successful investment methods, including a close parallel for each of the football handicappers.

My Favorite Methods

I described my favorite approaches in this article.  To summarize, I have a long-term perspective that plays upon market themes.  It is a long-only program, but it is not "buy and hold."  I also use short-term trading methods.  Finally, I recommend a dynamic asset allocation program that protects investors against big moves.

Each investor is different, but some combination of the methods works well for most people.

Not surprisingly, the methods sometimes disagree.  Let me look more carefully at the trading approach.

Background

Traders all seek rewards but they have differing appetites for risk.  It is important to find a method that suits your personality and needs.  Our short-term trading systems are basically Trend-following, but also include recognition of Cycles and a touch of Anticipation.  Since we apply the method to ETFs, we call it the TCA-ETF system.  We follow two versions of this method, designed for two clients (Oscar and Felix) with different needs and risk appetite.  [New readers can find more information about the models at the end of this article.]  For convenience, we have named the models based upon the intended clients.

This Week's Results

Felix, the cautious approach, has moved to the sideline.  This does not mean a prediction for a lower market.  If Felix had that forecast (briefly in place last week), the inverse ETFs would be in the buy range.  Instead, everything is in the penalty box.  Felix just sees the world as too unpredictable right now.

Oscar, the more aggressive approach, is always looking for a way to win.  Oscar is unafraid of the volatility and recommends the short side, holding all three inverse ETFs.  (We do not endorse or use leveraged ETFs).

Individual Stock Analysis

With encouragement from Vince (our modeling expert) I have been looking at individual stocks to see if Felix approves.  The results this week are interesting.

The Dow

Felix is not ready to move on my Dow 20K concept!  Felix has every member of the Dow in the penalty box, although two stocks have positive ratings.  I plan to provide regular updates on this analysis if there is reader interest.  I often use Felix to assist when starting a new position, so this could be a useful assist to those considering dipping a toe in the Dow waters.

The NASDAQ 100

The fussy Felix has assigned 99 of the 100 stocks to the penalty box.  The sole survivor is O'Reilly Automotive (ORLY).  Here is the chart.

Now here is the fun part.  Tonight on his popular Mad Money program Jim Cramer cited ORLY as a top choice.  Catch this:

First on the list were auto parts makers Advance Auto Parts (AAP), O'Reilly Automotive (ORLY) and AutoZone (AZO). Cramer said this trend makes sense, when things get bad, people keep their cars longer and fix them up.

Felix was operating on official closing data, without knowledge of the Cramer pick.  This will be fun to watch.  Will Felix and Cramer agree in the future?

Weekly TCA-ETF Rankings

We are currently out of the market in our Felix ETF program and short for those following Oscar.  (We are happy to report and discuss performance with interested investors.  We also offer a report on how we use the models, and a free weekly email update.  Write to etf at newarc dot com.  Our actual trading is a combination of both models and some weekly timing).

As recently noted, I am changing the timing schedule for this weekly article.  It will now appear mid-week, with a one-day delay in the ratings.  The ratings below are from Tuesday's close.

Please note that these are not recommendations.  Investor needs and risk tolerance varies.  We hope everyone finds the ratings to be a useful supplement to their own work.  The recommendations can change quite rapidly in this environment.

Here are the current rankings for both Oscar and Felix.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  We also have free reports, available upon request to etf at newarc dot com.  These reports describe how we use the system, compare results from Oscar and Felix, and contrast the method with our long-term trading approach.

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.

Oscar and Felix. We follow two versions of this method, designed for two clients with different needs.

• Oscar believes in the long-term strength of the economy and the stock market.  He has a lovable and irrepressible enthusiasm.  When things go wrong, he steps back for a bit, but soon tries again.  He expects to do better than others during good times.  Oscar understands that this approach involves more risk.  Oscar is opportunistic.

• Felix also has a positive long-term outlook, but he is something of a fussbudget.  He is much more cautious, with an emphasis on capital preservation.  He is perfectly willing to step aside from the market when there are signs of danger.  He knows that he will miss some moves, but that is OK.  He scores big gains when the market moves lower and he escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.

Dow 20K

Someone needs to say this:

Dow 20K.

The fear mongers abound in the financial media.  TV and online ratings seem to go to those helping to peddle fear and sell gold or structured annuities (with high commissions attached).   Every individual investor I meet is scared silly.  They do not realize what is at stake.

For the mainstream media, it is all about ratings.  They have all learned that fear sells.  Attacking Obama, attacking Bernanke, attacking European leaders, explaining government policy as if it were the family budget ---  it all works.  The big-time media have garnered page views and sold papers.

Even when they attempt to show "balance" they have someone warning about Dow 5000 and the "bull" saying that stocks will go up 8% this year!  Is it any surprise that watchers are scared witless?

Investors need to understand that they are missing more than an 8% move.  Stocks will double.  When will they get on board?  Do they have a plan?

The Proposition

Let us attempt to restore some balance.

There is undue publicity given to Dow 5000.  A 50% decline has happened only twice in history.  The first time was in the Great Depression.  The second time was when people incorrectly believed that the fall of Lehman would lead to another depression.  As we now know, that was incorrect.  March, 2009 was a buying opportunity.  What about now?

Here is the proposition.

The Dow will double before it is cut in half.

I want to make this proposition right now, with the Dow around 10,000 and many forecasting 5000.  A prediction needs a time frame.  That is part of my current research.  For the moment, let me just say that it is shorter-- much shorter -- than most people would think.

The key point?  Most do not realize the cost of sitting out the return to normalcy of stock prices.

Obviously, this argument needs more evidence.  With the Dow crossing 10,000, today was the right day to start.

Want to Measure Sentiment? Here is a New Idea

Market observers all want to measure sentiment.  Here is the general point of agreement:

When everyone is in the market, there is no one left to buy.

and of course we have the opposite --

When most are on the sidelines, there is no one left to sell.

The general interpretation of sentiment is contrarian.  The indicators include (but are certainly not limited to) the following:

• Individual investors measures, like the American Association of Individual Investors (AAII);
• The put/call ratio (interpreted as "public money" buying one or the other);
• Insider transactions;
• Who is featured on CNBC;
• Magazine covers;
• NYSE specialist positions; and
• Various polls, including those of supposed experts.

I am sure that I have left out a few, but you get the idea.  Occasionally someone advertises a poll as seeking the opinion of "smart money" but everyone interprets it as contrarian anyway.  It is a tough crowd and no poll gets respect!

Current Readings

Most of the sentiment measures are not objective, especially the interpretation of CNBC guests.  The bears think that it is a parade of market cheerleaders.  The bulls see a bunch of worrywarts.  What is needed is something that you can actually measure.  It would be especially good if the measure had some predictive value.

Looking for a fresh idea?  Here are two new  candidates:

• US versus Germany.  Cramer thinks that the market is "too negative" and points out that the S&P has declined more than Germany, despite less exposure.
• Earnings reactions.  In case you were not watching, the earnings reports were excellent, beating expectations and with generally strong guidance. ( I understand that some feel this was already anticipated by stock prices).  Meanwhile, the results are very dramatic.  The excellent team at Bespoke Investment Group highlights in one of their typically excellent graphs that this was the absolute worst earnings season in a decade.  I am not going to copy their graph, but you should visit their site for a look.

 Both of these ideas are measurable and objective indicators of negative sentiment.

The Very Best Sentiment Measure

There is one indicator that is the absolute best for identifying sentiment.  It is the flash point between the bullish and bearish communities:  Forward Earnings.

For those who view the sell-side analyst community as a work force, helping us to identify trends in future earnings, it is a dramatic and appealing prospect.  The current yield on forward earnings is 7.85%, a rate close to that offered at the market lows of February to March of 2009.  (Brian Gilmartin of Trinity Asset Management covers this for his client base and for TheStreet.com's Real Money site.)

By this measure, the market is just as cheap as it was at the time of the 2009 lows.

The bears believe that analysts are captives of sell-side firms and the companies they cover.  It is a debate that can and should be resolved by data.

Some Comparisons

For those who want some data, I took up this topic many years ago, highlighting the error made by a prominent sell-side analyst.  This article (which I think is one of my best) is still worth reading.

Here (from Tom Armistead at Seeking Alpha)  is another approach, splitting the data set instead of using a quadratic term.   The basic idea is that if there is a great fear of deflation, the PE multiple for stocks is low.  If deflation is off of the table, stocks enjoy a multiple that competes with the higher bond yields.

Tom is getting at the same concept I found with a slightly different method.

Our Take

I think that the forward earnings yield is an excellent sentiment indicator.  If we actually achieve anything close to the projected earnings, the market is cheap -- very cheap.

The conclusion is obvious.  For the moment, the marginal market participant is very skeptical about future earnings.

Some big players disagree.  Nick Thakore, manager of the $4 billion Putnam Voyager Fund has this take:

People have been so burned that they're missing the cyclical recovery and an epic earnings recover.  It looks like 2011 could be an all-time earnings record for the S&P 500.

Conclusion

It is all about earnings.  We know what to watch for and also how to place our bets.

Weighing the Week Ahead: Focus on the Economy

For several weeks markets have focused on Europe, with headlines pounding out the message of risk.  There may not be anything really new  to say on that subject, but that will not stop anyone!

I expect continuing actions by European governments, both individually and collectively.  The punditry will criticize each action for being premature (and too slow), not sufficiently transparent (and lacking surprise), revealing weakness by taking an aggressive stance (and failing to deal as comprehensively as did the US).

Put another way, the pundits will all agree that politicians of all sorts are stupid. They will disagree about how and why.  This will be a convenient explanation if markets move lower.

Meanwhile, there is a busy economic calendar, and it should get some attention.

Background on "Weighing the Week Ahead"

There are many good services that do a complete list of every event for the upcoming week, so that is not my mission.  Instead, I try to single out what will be most important in the coming week.  If I am correct, my theme for the week is what  we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

Last Week's Data

The actual data from last week generally beat expectations .  If you had just been reading the news flow from the US, you would never have predicted the wild swings and negative bias.  Let us take a closer look.

The Good

The economic news was good enough for many to reaffirm a "V" recovery. 

• There is no sign of inflation, no matter how you measure it.  The Fed looks to be on hold for many months, with a tilt toward helping the economy.
• The FOMC minutes confirm the general bias of Fed policy.
• Rail traffic is strong.  This is a solid, measurable economic indicator at the highest level since 2008.
• Mortgage rates declined again.  (so much for worries about the end of Fed buying).

This is continuing solid news.

The Bad

I am pretty fussy about economic news related to jobs and housing, and I did not like what I saw.

• I closely watch building permits as the best leading indicator of new construction.  Construction is up (reflecting the tax credit, which has now expired) but building permits were down 11.5%.
• The BLS report on Business Dynamics showed job losses for the quarter ending in Sept., 2009, were about 300K worse than expected.  You will not see this news anywhere else.  Even though this is an "old" report, people should watch it as a way of verifying the accuracy of the "official" BLS payroll employment report projections.  Basically, this is an early read on eventual "benchmark" revisions.  There was plenty of job creation, including a million jobs from new establishments, but still not as much as estimated.  More detail is beyond the scope of this weekly summary, but those interested can get the essentials of the argument in my analysis of the November report (different time, same issue).
• The uptick in initial claims was also a negative for jobs.  We really need to see progress on reduced layoffs and more job creation.  Both seem to have stalled.
• The S&P 500 broke the 200-day moving average.  Many people view this as the most important technical indicator, keeping them on the right side of major trends.  This is being quoted as 1102 or so, and is something to watch.
• The ECRI indicators are in the growth area, but weaker than in past weeks.  Their interpretation?  "With WLI growth sinking further to a 43-week low, U.S. economic growth is set to start easing in fairly short order."  This seems to be an unusually strong emphasis on a "second derivative" interpretation of a strong reading, but it is their index.  I look at their numbers, but also at their own interpretation.

The Ugly

The high volatility in trading is frightening to nearly all investors.  Thursday was especially bad.  The extremely late rally on options expiration day makes the week's pricing look a bit better, but most observers will need much more convincing.

Market behavior is making the worst of every piece of news, a trend that traders must accept.

The Irrelevant

There was a lot of meaningless noise.

• LEI.  I do not find the "Leading Economic Indicators" to be very helpful so the downtick is irrelevant for me.  These indicators are not very good at leading.
• Financial Reform.  There was a lot of silly commentary on this subject.  Some attributed selling to this cause, just because the timing fit.  Consider these points -
• • No one really knows what will happen.  We still need to have a conference committee to reconcile the House and Senate versions.
  • Barney Frank has tipped off the House position.  I realize that most market observers do not like Chairman Frank and his positions.  Once again, I emphasize that this is irrelevant to our task of predicting outcomes.  His approach is likely to aid financial firms in necessary hedging, as well as other things.
  • The Senate version of the bill is actually better than was generally expected.  See Barron's on this.
    

The Week Ahead

It is a big week for market data, including multiple readings on housing and consumer confidence.  There will be data on durable goods, personal income and spending, and the Chicago purchasing managers report.

I am particularly interested in home price data, although this is subject to massive spinning, mostly negative.

I also closely watch the Michigan sentiment indicator and initial claims, which I see as good indicators of employment.  The Chicago Purchasing managers are often a good read on the ISM index.

I do not expect the European debate to reach an instant conclusion, but the upcoming news is difficult to predict.  This will take years to play out.  Most observers are (unwisely) trying to make definitive predictions of an outcome where the situation is evolving and fluid.

Our Trading Forecast

Our own indicators turned neutral last week and remain so this week.  That was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

• Only 33% ( 31% last week) of our ETF's have positive ratings.  This is moderately weak.
• The median strength is only -5 (the same as last week). This is a slight negative.
• 100%  (up from 98%) of the sectors are in the "penalty box," showing an extremely high level of uncertainty and risk.
• Our Index Package now has a very small negative rating.

[For more on the penalty box see this article.  For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

For short-term accounts we were short for part of the week, but covered shorts on Thursday.  We currently have no positions.

Investment Implications

For short-term trading, our three-week time horizon, the models indicate that the uncertainty is just too great.  We have no positions.  This position is a matter of daily review.

For long-term accounts, there are many attractive stocks.  This is especially true in technology where the upgrade story is intact, and the stocks declined in the general panic.

I expect another exciting week, although volatility seems to be at a peak.  For some accounts, writing calls against new or existing stock positions could make sense.  Investors should beware of straight call purchases when volatility is so high.  It is possible for the stock to move higher while the option does not fully participate.  If you do not understand this, you should not be trading options.

Market Observations

Eventually market prices reflect reality.  There is currently a disconnect between the two.

I have been very good at predicting public policy outcomes, so let me start there.

Background

There are suddenly a long list of experts on the European Union.  If you listen carefully to the talking heads, it seems like most of them could not find Greece on a map!  What most are doing is taking their own political opinions and complaining that Europeans are doing something different.

Let's consider a few specifics.

Debt

Facts.  The IMF just issued a report, covered nicely in the New York Times.  Take a look at this graph.

In the G20 countries, about 2/3 of the increase in debt has resulted directly from the recession -- revenue loss.  Less than 10% has come from stimulus programs to revive economies.

Prediction.  All of these countries are pursing Keynesian policies to revive the economies.  Those complaining about added debt will be completely incorrect in predicting the policies, and eventually incorrect in predicting the economic result.  Debt will need to be addressed, of course, but it can be better done from a position of economic strength.

European Assistance for Greece

Fact.  It was only ten days ago that the European Union announced the trillion-dollar "shock and awe" package of assistance.  After a one-day rally in world-wide markets, there was a chorus of criticism that the plan merely delayed the recognition of the problem.  (Aren't we all tired of hearing about "kicking the can?")

We now hear confident talking heads opining about European life styles, the need for debt restructuring, and which countries should leave the European Union.  They all agree that the plan "has not worked."

This is interesting, of course, since the plan has not been approved by all countries and the implementation has barely started.

Prediction.  The plan will work.  If it is not completely effective, there will be changes.  It will be made larger.  There will be world-wide cooperation.  There will be currency interventions.

The bearish punditry will be no more accurate than they were in fighting the Fed or the TARP program.  Governments will try different strategies.

Most importantly, delay is good.  One prominent commentator called the program a "Hail Mary" and also acknowledged in the same article that it might take years to play out.  This is silly!  The program is a game plan and the game has not even started.  We are a long way from knowing the outcome.  Probably it will involve a number of compromises on debt and austerity.  The "Hail Mary" title is a misleading symbol.

I also predict that aid to Spain and Portugal will be less than expected.

Moody's Investors Service last week put Portugal's Aa2 rating on a three-month review for a possible downgrade, but said that though Portugal's financing costs might rise for some time because of market pressures, it expected debt servicing to "remain very affordable in the near to medium term".

It said "the government's debt is neither unsustainable nor unbearable."

Diego Iscaro, economist at IHS Global Insight in London, said: "I don't think Portugal has liquidity problems, so the need to apply is surely below 50 percent. All depends on how this aid will materialise, but I'd say the probability is about 20 percent in a 12-month horizon."

Most are ignoring these probabilities and invoking dominoes as their rationale.

Independent German Actions

Fact.  Germany chose to institute a restriction on naked short selling.  Some market participants did not like this.  Many in the media summarized this as a ban on short selling, a completely different matter.

Prediction.  Financial markets had better get used to independent action by some European countries.  They may find it more effective to lead by example than to take months to negotiate an agreement among 27 nations.

Furthermore, the idea that this reveals some fear about "toxic assets" is an unwarranted and simplistic inference.  Why shouldn't Germany institute a policy that the US already has?  Meanwhile, the Europeans are going to improve over US policies in the crisis by controlling CDS's and by not insisting on mark-t0-market for illiquid assets.  If only the US had been so smart.

Effects on the US

Fact.  There is an ongoing rush for people to predict effects on US corporate earnings.  Fed Governor Daniel Tarullo said the following:

In the worst case, such turmoil (in Europe) could lead to a replay of the freezing up of financial markets that we witnessed in 2008.

and also

...A repeat of the global financial crisis that followed the Lehman Brothers bankruptcy in 2008 is unlikely, but "not out of the question."

Please note that this is only one Fed Governor and, most importantly,  he said the result was unlikely.  It was a warning, not a prediction.  The headline was played for scare value on CNBC and in headlines.  It also completely contradicts yesterday's extensive Geithner interview with Maria Bartiromo.

Prediction.  Warnings are useful since they help to galvanize action, but a jittery market overreacts to warnings.

How about a little math?  The only thing you hear is that Europe is 20-25% of sales for many companies.  Suppose sales fall by 10% in Europe, a huge number, much greater than the expected economic weakness.  That would be a 2 - 2.5% sales loss.  People ignore the offsetting effect of a strong dollar on domestic purchasing power.  These effects are complicated, but the stocks have already declined far more than any expected earnings shortfall would justify.

Conclusion

There are many more points, but it really requires a truth squad to patrol all of the misleading information. 

Many observers are applying their own ideology and standards to Europe.  They will be proven wrong in their ability to predict the policies adopted, and the eventual success of the programs.

Meanwhile, many US stocks with little relationship to Europe or the strength of the Euro have declined significantly.  So many have been waiting for a correction.  Now that we have one, the fear mongers are all predicting a market crash.

Corrections are a natural part of investing, and ten percent is not unusual.  The disjunction between facts and market perceptions is what provides opportunity for investors.  I knew there would be an excessive reaction to Greece, but I really did not expect it to persist after the plan was announced.  As I said in the intro, I have been much better at predicting policy outcomes than how the market will react. Meanwhile .....

Those who wait for every problem to be solved before investing will be buying the top.

ETF Update: Winners Choose and Respect Their System

Do you have a systematic approach to your investing?

You do, whether you know it or not.  If you float from one idea of the moment to another -- well -- that is a system.  And it is a very bad one.

ETF investors need to make several important decisions.  In today's article I want to step away from my regular weekly feature of our top sector, and focus on the important strategic choices for investors.

You need to pick a method and have the discipline to follow it.

Background - a Brief Digression

To provide some context, I provide regular updates about ETFs.  Some have found this helpful in their own ETF research.  I hope you find the series helpful, and I invite comments and questions.

Traders all seek rewards but they have differing appetites for risk.  It is important to find a method that suits your personality and needs.  Our trading systems are basically Trend-following, but also include recognition of Cycles and a touch of Anticipation.  Since we apply the method to ETFs, we call it the TCA-ETF system.  We follow two versions of this method, designed for two clients with different needs and risk appetite.  [New readers can find more information about the models at the end of this article.]

Momentum Investing

The inspiration for this article came from a typically excellent piece at Abnormal Returns.  Tadas explains the history of momentum investing, shows where to check out academic literature, and provides a link for those wanting to review success of the method.  He raises interesting questions about how and why this approach seems to work.  I strongly encourage readers to review the entire article and also to consider the links.  This is an important topic.

If you choose your system correctly, it will, in the end,  save a great deal of time.

Two Small Additions

As a long-time student of these methods, I suggest two small additions to consider.

First, there is the long tradition of trading price trends.  Richard Dennis, the legendary Chicago trader, in an experiment not unlike the movie, Trading Places, recruited and trained a group called the Turtles.  One of the original Turtles has (controversially) revealed some of the methods.  He makes a distinction between trends and momentum in this article.

It is beyond my scope to review the whole story, but this link will get you started if you are interested.  The Turtle alums have done very well, and so can you if you learn how to apply these methods.

Second, there is a plausible explanation for momentum.  Please keep in mind that according to the Efficient Market Theory, momentum trading should not work.  Warren Buffett has famously noted that if EMT was correct, he would be selling pencils on a street corner.  So what is the problem?

Tom Brakke, one of the very best sources on earnings and analysts (and now added to our list of featured sources), explained why momentum usually occurs as analysts revise ratings.  Briefly put, an analyst gets a new idea about a copmany and it deviates wildly from the pack.  Why beat the rest of the analysts by so much?  He posts new estimates that are only a bit higher.  Others eventually see the light, so you get a leapfrog effect.  Tom explains it much better than I have, so read his excellent piece.  If you do, you will see why it is important to watch the changes in earnings estimates. something that Zack's also emphasizes.

To summarize, the trend-following trader expects something that happened in "Time A" to continue into "Time B."  The reason is twofold:

1. Trend-following satisfies the natural human urge to connect the dots.
2. Trend-following methods actually work, with long track records of success.

It all comes down to how one defines the time periods.

Other Systems

I have had several inquiries about doomsday market predictions.  Doom and gloom sells papers and page views.  Peter Lynch once said that he could not predict the next 1000 points in the market, but he knew about the next 10,000.  This is no longer a blogworthy observation and it won't get you on CNBC!

As you read this, please understand that my company is known as a system developer and reviewer.  I am bombarded with ideas and approaches, including technical analysts of all stripes.  I could choose any method for our clients.  My comments reflect a considered evaluation.  If there were good evidence to do so, I could add a new method to our current systems (now four approaches.  I understand that loyal adherents of other methods will disagree, so feel free to chime in via comments.  My only request is that you actually use data and evidence.

Here are two recent questions:

Q: What do you think about the Elliot Wave Theory prediction that we are in the midst of a grand super-cycle correction to .......?

J:  I am not convinced.  The underlying theory lacks intellectual and evidentiary support.  The results are erratic and very subjective.  This is from technical analyst David Aronson:

The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong.

The long-term results have been terrible, but the method is getting recent buzz since Robert Prechter called two recent moves for followers who had any money left.  This is very dangerous, because many observers look to systems that are "hot."

Using data from newsletter tracker Mark Hulbert, syndicated columnist Eric Tyson showed that Robert Prechter, publisher of the Elliott Wave Theorist and leading practitioner, has underperformed the broad market averages by 25 percent per year since 1985.^[24]. Mark Hulbert in November 2009 wrote "Prechter's advice over the last couple of years has been top-rated. It's not just that he was bearish during the financial meltdown -- he also did a good job of playing the various intermediate-term corrections along the way." However this top-rated performance was short lived given that Hulbert notes that "Prechter's longer-term record couldn't be more different. The last time that his newsletter recommended that traders be long stocks was in 1997, some 12 years ago. In fact, during the bull market of the 1990s, traders following his advice spent most of the time short the market or in cash. This helps to explain why the newsletter's timing advice for traders is in last place for performance over the last 20 years among all stock market timing strategies tracked by the Hulbert Financial Digest." ^[13].

Q:  What about the recent Dow Theory sell signal from Richard Russell?

A:  Our own sector models are showing the same things as the Dow theory, at least on the three-week time frame.  If you are a trader, it may be a good call for that time horizon.  Our method is an improvement on Dow Theory since it covers 55 sectors.  Meanwhile, here is a good analysis of Russell's long-term performance.  You will see that it has not been good for many years.  It is not as flexible and timely as a method that considers more sectors.

To emphasize -- these are short-term predictions.  It may be completely correct for the long-term investor to buy at the same time that short-term traders are selling.  It is all about individual needs, time frames, and risk tolerance.

You need to decide if you are a trader or an investor.

Weekly TCA-ETF Rankings

We are currently short in our ETF programs,  invested only in inverse ETF's.  (We are happy to report and discuss performance with interested investors.  We also offer a report on how we use the models, and a free weekly email update.  Write to etf at newarc dot com.  Our actual trading is a combination of both models and some weekly timing).

I am changing the timing schedule for this weekly article.  It will now appear mid-week, with a one-day delay in the ratings.  The ratings below are from Tuesday's close.

Please note that these are not recommendations.  Investor needs and risk tolerance varies.  We hope everyone finds the ratings to be a useful supplement to their own work.  The recommendations can change quite rapidly in this environment.  Last week I predicted that everything would be in the penalty box, and I was right.

Here are the current rankings for both Oscar and Felix.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  We also have free reports, available upon request to etf at newarc dot com.  These reports describe how we use the system, compare results from Oscar and Felix, and contrast the method with our long-term trading approach.

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.

Oscar and Felix. We follow two versions of this method, designed for two clients with different needs.

• Oscar believes in the long-term strength of the economy and the stock market.  He has a lovable and irrepressible enthusiasm.  When things go wrong, he steps back for a bit, but soon tries again.  He expects to do better than others during good times.  Oscar understands that this approach involves more risk.  Oscar is opportunistic.

• Felix also has a positive long-term outlook, but he is something of a fussbudget.  He is much more cautious, with an emphasis on capital preservation.  He is perfectly willing to step aside from the market when there are signs of danger.  He knows that he will miss some moves, but that is OK.  He scores big gains when the market moves lower and he escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.

Anchoring, Negativity, Popularity, and Dow 5000

A wise and good friend recently commented that he did not read any blogs.  None!

He knows that I have a blog, and asked me if there were any (other than my own) that I would recommend.  That is a topic worth considering, and I shall return to it.  Meanwhile, I invite comment.  The problem, of course, is that there is too much information.  Those of us who read financial commentary all of the time are accustomed to absorbing many disparate sources and filtering the results.

Most readers cannot or will not do that, so what should I recommend?  My friend wants a (very) few sources that he can read like a newspaper.

What Not to Do

Financial media, whether televised, print, or pixel, have incentives that are not aligned with investors.  I realize that the readership of "A Dash" is sophisticated and includes many colleagues who are investment advisors.  For a moment I invite you to pretend that you know nothing about the markets and tuned into CNBC today for the first time.  Your TV dial strays to CNBC and you see a guest who says the following:

“The Dow 5,000 piece is very likely—that’s not even the extreme low,” Hefty told CNBC. “It only takes a few hedge funds to get that margin call."

"When they start to sell—and the fact that everyone’s on pins and needles—that’s where the freefall starts to take place, like oil back in 2008," he said.

This was actually a re-run from last week.  The Dow 5000 piece got a lot of buzz and good ratings, so CNBC went with it again.  They also did one of their silly "polls" of viewers.  These are not scientific, of course, as they always note.  The polls are popular methods of getting a lot of page views for the web site.  The results tell you more about the viewers (and those bothering to vote) than any real information.

The poll asked respondents to choose between Dow 12000 and Dow 5000.  The Dow was at (approximately) 10500 at the time.  This type of bet can be great fun if it is fair and balanced.  If the Dow is at 10500, you bet 11 versus 10 or 12 versus 9 --- a balanced choice, bull versus bear.

The Dow 5000 question is intentionally provocative and biased.  Here's why.

Anchoring

There is a well-known behavioral psychology effect known as "anchoring."  If you start an audience with an idea -- even a randomly chosen number -- that number has a powerful effect on their estimates of reality.  It applies even in extreme cases.  A favorite example invited respondents to state when Einstein first visited the United States.  Several "anchors" were introduced including 1215, 1905, 1930, and 1992.  The extreme anchors attracted an anchoring effect equal to the more reasonable choices.  (from Heuristics and Biases, Gilovich, et. al.)  There are other good anchoring examples in the Wiki explanation, but I want to emphasize that the extreme and biased posing of the question.

And what of the CNBC viewer response?  As of my most recent check, 40% of respondents chose Dow 5000.

This may be an accurate reflection of the online community -- a mindset that is ultra-bearish, highly political, anti-government, anti-Obama, and generally sour about everything.  It has little to do with rational investment decision-making.  Briefly put, the rational investor is politically agnostic and always looks for the best opportunities.  He/she is opportunistic, looking to buy when others are making foolish mistakes.

The CNBC spot does not help investors, but it might help their ratings.

Anchoring on Seeking Alpha

Regular readers know that I contribute to Seeking Alpha and find it to be a valuable source  in my own research.  My editor has made many valuable suggestions to improve my work.  Used properly, the site is an extremely valuable resource.  You can select certain people to "follow."  These can be writers or readers who comment regularly.  Everyone can get a thumbs up or thumbs down on comments.  When I notice intelligent reader comments, I often choose to "follow" that reader, leading me to other good articles.

Here is what typically happens.  Today there is a thoughtful article from a source with great credentials.  The author actually uses data to support arguments.  There is none of the profanity that seems so popular in online articles.  He is restrained and thoughtful.  As it happens, he arrives at a bullish conclusion.

The result?  The article becomes one of the most popular on Seeking Alpha, mostly because it is a target for the bearish community.  There are over 200 comments.  The article was read, no doubt, by several thousand readers.  Meanwhile, the comments are overwhelmingly bearish.  Here is an example from someone who regularly makes lightweight comments with no reasoning or evidence in support:

This guy is a flat out crazy cheerleader. Someone get him a job on CNBC.

This "insightful" observation had 56 thumbs up and ten thumbs down.  You can check other entries to see the trend.

Does this make a difference?  I think that it does for the rookie online investor.  The behavioral psychology evidence is pretty clear.  No matter how stupid the comments are, no matter how few people are voting with the thumbs, it has an effect.

Investment Conclusion

There are many sentiment indicators and everyone wants to be a contrarian.  My own read on sentiment relates to what I hear from individual investors.  Most of them are paralyzed by fear.

Financial media of all types contribute to that fear.  The investor is not well-served.

Meanwhile, if I had to recommend a single investment blog to my friend, which should I choose?

Weighing the Week Ahead: Euro Weakness Increases Risk and Opportunity

For most of us in the investment business travel takes you away from home base, but not away from the market.  I always hope to write a piece or two, but it is difficult.

Issues related to Europe dominated last week's trading, and promise to do the same this week.  There is a bull market in superficial analysis and distortion.  My objective is to give readers a good start on sorting it all out.

Here was the story that moved markets on Friday.  It raises many questions about news media and sources.

Paul Vocker, Former Fed Chair and current Chair of the President's Economic Recovery Advisory Board gave a speech in London on Friday.  He noted the potential disintegration of the euro, the need for discipline in economic and fiscal policy, and further European political integration.  He also noted that Europe had been well-served by the euro and that current problems would be bigger without it.

After the speech he declined to elaborate on what European governments should do.  Bloomberg quoted him as follows:

That is up to European governments.  The nature of the problem does not lend itself to one-word sound bites.

This is exactly what I predicted (on May 4th) would happen in The Battle of the Sound Bite.  The problem lends itself to simplistic analysis and slogans. Yves Smith notes that Bloomberg cherry-picked the quotation for their main thesis and cites other alarmist headlines as follows (read her entire piece for her analysis of what Europe needs to do):

Volcker Sees Euro ‘Disintegration’ Risk From Greece [Bloomberg]

Volcker worries about future of the euro

^_[Reuters]

Volcker: The Euro Is On The Brink Of Extinction

[Business Insider]

As these headlines crossed the tape traders engaged in a natural reaction -- trading!  This sort of information does not lend itself to a nuanced interpretation.  Joe Weisenthal explains that this as a key reason in :

STOCKS HAMMERED AGAIN: Here's What You Need To Know

A little more perspective is needed.  I'll return to this theme below.

Background on "Weighing the Week Ahead"

There are many good services that do a complete list of every event for the upcoming week, so that is not my mission.  Instead, I try to single out what will be most important in the coming week.  If I am correct, my theme for the week is what  we will be watching on TV and reading in the mainstream media.  It is a focus on what I think is important for my trading and client portfolios.

Last Week's Data

The actual data from last week were encouraging.  If you had just been reading the news flow from the US, you would have expected a nice market week.  It was a nice week, up over 2%, but not the way you would expect.

The Good

The economic news last week was generally quite positive.

• Retail sales were up 0.4%, beating expectations.
• Mortgage rates declined again.  (so much for worries about the end of Fed buying)
• Industrial production moved higher.
• Small business optimism had an uptick -- finally.
• Earnings season ends with 70% of companies beating expectations.

Initial jobless claims are still stuck in a range. 

The Bad and the Ugly

The Ugly award certainly goes to the market reaction to the European situation.  Monday's trading saw huge gains, reflecting the size and scope of the proposed plan.  The rest of the week was all downhill.  Half of the Monday gains were lost, but the wild swings made it seem even worse.

A Simple Explanation

Any new government proposal generates an immediate reaction from the financial punditry.  Mostly the articles describe perceived shortcomings of the plan.  Critics expect a plan that has the following characteristics:

• Specific identification of causes,
• Specific and detailed programs that address each cause, and
• General agreement and endorsement of everyone involved.

In addition, each pundit wants the plan to agree with his/her own notion of the causes and solutions.  These are usually different and inconsistent.

I have been studying this for some time.  There are very few market participants with backgrounds in political science, public policy, organization theory or related fields.  Most people think about how they make their own decisions and assume that governments follow the same rules.

In practice, governments rarely act in this fashion.  It is much more common to have a general agreement about a problem with absolutely no agreement about causes.  It is easier to agree on policy than about theory.

Governments adopt general approaches, testing what is working.  They do more of what works and less of what doesn't.  Readers might want to compare this to the early criticism of the US response to the crisis.  The pundits said similar things about Fed programs and TARP.  Not all of the programs worked as planned, but in the end, that did not matter.

Here is a simple analogy.  Let us suppose that you were a football coach creating a game plan.  Instead of playing the game, the fans voted on whether you won or lost based upon your plan.  You did not get to make any "halftime adjustments."

Or suppose that you had to lay out, in advance, all of your proposed trades for the next month -- at the market!

No coach and no trader would do this.  Meanwhile, people expect government policy to specify causes and plans in detail, even though the problems are far more complicated than football or trading.

No one in financial punditry understands this.  They do not grasp how large organizations behave.  If you do, you have an edge.

Investment Implication

Eventually the breathless headlines will cease and the market will stabilize.  I regularly compare coverage from mainstream traditional sources like the New York Times and the Washington Post with financial media.  There is much less concern about Europe in non-financial sources.  It will be up to CNBC to give us "breaking news" on the euro trading down another fraction of a percent.  The real world is moving on.  Eventually the markets will catch up.

Our Trading Forecast

Our own indicators have turned neutral, and that was our vote in the weekly Ticker Sense Blogger Sentiment Poll. Here is what we see:

• Only 31% (down dramatically from 80% last week) of our ETF's have positive ratings.  This is moderately weak.
• The median strength is only -5 (down from +10 last week). This is a slight negative.
• 98%  (up from 60%) of the sectors are in the "penalty box," showing an extremely high level of uncertainty and risk.
• Our Index Package now has a very small negative rating.

[For more on the penalty box see this article.  For more on the system ratings, you can write to etf at newarc dot com for our free report package or to be added to the (free) weekly email list.  You can also write personally to me with questions or comments, and I'll do my best to answer.]

For short-term accounts we are almost completely out of the market.

For long-term investors it is the familiar problem.  The times of opportunity present a challenge involving both recognition and fortitude.  Can you really act when others are spreading fear?

For those who have this ability you might start with stocks that reported great earnings, but have recently been pulled down in price.  Here is a list from The Bespoke Investment Group, one of our favorite sources.

ETF Update: Can Banks Benefit from Financial Regulation?

(I delayed this article from my regular Sunday posting time since there was so much volatility, perhaps generating misleading signals.  The ratings have been updated to reflect the current situation and do not include the customary one-day lag).

It now seems clear that new financial regulations will soon become law.  Can banks benefit from this development?

Background

Traders all seek rewards but they have differing appetites for risk.  It is important to find a method that suits your personality and needs.  Our trading systems are basically Trend-following, but also include recognition of Cycles and a touch of Anticipation.  Since we apply the method to ETFs, we call it the TCA-ETF system.  We follow two versions of this method, designed for two clients with different needs and risk appetite.  [New readers can find more information about the models at the end of this article.]

Let me discuss this week's featured sector before turning to our own ratings.

Spotlight on the Banks

We trade banks via the SPDR KBW Bank ETF (KBE).  The ETF tracks the KBW Bank Index.  It has very good diversification -- 25 holdings with most in the 4% to 6% range.  A few large banks are higher, but no single holding is over 9%  The forward P/E ratio is over 17 and the trailing is over 20, but the price to book is only 1.01.  The dividend yield is under one percent.  Here is the chart:

Fundamental Analysis

Some of the news for the sector relates to the financial reform bill.  ETF Daily News opined that changes in the bill were favorable to banks.

There is a consensus that the regulations are more significant for large banks.  Even those institutions may have pricing that reflects the pending legislation.  GOP changes have relaxed some concerns raised by the banks, especially those related to cost-cutting as a function of size.

Tom Lydon reached a similar conclusion,  citing a MarketWatch column assessing the regulatory impact.

In my weekly market column I expressed caution about banks because of possible European exposure.  Any improvement in Europe is a positive for financial stocks, so the weekend news was bullish.

Other ETF Experts

We always monitor the conclusions of other ETF experts when considering a trading position.  This week none of our sources cited the group on technical grounds.  (It is important to note the absence of support for a position).  It is fair to say that this group is "unloved."

Weekly TCA-ETF Rankings

We are currently fully invested in our ETF programs,  but there are only a few remaining candidates in the "buy" range.  We are happy to report and discuss performance with interested investors.  We also offer a report on how we use the models, and a free weekly email update.  (Write to etf at newarc dot com).  Our actual trading is a combination of both models and some weekly timing.

We usually publish the ratings list as of Thursday's close in our weekend update, a one-day delay.  Given the wild market gyrations from the last few days, I felt that the Thursday ratings would be unhelpful and perhaps even misleading.  Instead, I delayed the article for a day.  I am also including today's current ratings.

Please note that we are not recommending these sectors, since investor needs and risk tolerance varies.  We hope everyone finds the ratings to be a useful supplement to their own work.  The recommendations can change quite rapidly in this environment.  I would not be surprised to see every sector in the penalty box in a few days.

Here are the current rankings for both Oscar and Felix.  It is interesting to note that Oscar is even more negative than Felix.  While we are mostly following Felix, fans of Oscar should note that the inverse ETFs have positive ratings.

  

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  We also have free reports, available upon request to etf at newarc dot com.  These reports describe how we use the system, compare results from Oscar and Felix, and contrast the method with our long-term trading approach.

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.

Oscar and Felix. We follow two versions of this method, designed for two clients with different needs.

• Oscar believes in the long-term strength of the economy and the stock market.  He has a lovable and irrepressible enthusiasm.  When things go wrong, he steps back for a bit, but soon tries again.  He expects to do better than others during good times.  Oscar understands that this approach involves more risk.  Oscar is opportunistic.

• Felix also has a positive long-term outlook, but he is something of a fussbudget.  He is much more cautious, with an emphasis on capital preservation.  He is perfectly willing to step aside from the market when there are signs of danger.  He knows that he will miss some moves, but that is OK.  He scores big gains when the market moves lower and he escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.