A Dash of Insight

Is This a Tradable Bottom?

We have had some inquiries about our "Gong Model."  They say that no one rings a gong at the bottom, so our marketing department thought this was a cool name.  This article showed a good description of the last time the Gong sounded.

Many traders are seeking "oversold signals" and calling the bottom.

The Gong is not now signaling a bottom, and it is not close.  The Gong model has two parts.  First the hammer must be drawn back, and we are not yet at that stage, nor close to it.  Second, the mallet must come forward.  We'll provide some updates.

Can We Be Wrong?

Of course.  We can certainly be wrong.  If tomorrow's payroll number is surprisingly good, given the +/- 100K confidence interval, the market could rally by a couple of hundred Dow points on a report showing surprising strength.  Our report on The Gong, and other methods, are available to readers on request.

Our intermediate-term outlook has grown increasingly bearish over the last month or so, as documented in our participation on the TIckerSense blogger sentiment poll.  We have reported this both there, and on the weekly updates of our TCA-ETF system.

It is entirely possible that we will have a rally without The Gong.  Also, the gong model gives an entry signal, but not an exit.  We have searched hard for the ultimate bottom-calling method, but we are realistic.  It is not easy.

The Importance of Time Frames

While our system signals have been negative, we have been less convinced by the fundamentals.  In our programs, we have the system (affectionately called the "Vince Model") and the fundamentals, (called the "Jeff Model").  The time frames are different.  The "Jeff'" model is geared to the long-term investor and has a great long-term record.  It is thematic, and the themes have worked over a period of more than ten years.  It is not a trading system, although we obviously try to find the most promising stocks and sectors.  We currently believe that people have become far too negative about the economy and economically sensitive stocks.  Vince sees more pain in the near term.

Readers may be interested in our discussion of the importance of time frames.  We also have written about how a single trade can have two winners -- those who have different time frames or investment objectives. It is not just a question of the immediate stock reaction.

Conclusion

In a difficult market it is important to have one's primary objective in mind.  Traders and investors can reach different conclusions.  One theme is the reaction of the individual investor -- scared out at market bottoms.

Is this the bottom?  Probably not, but that does not mean bailing out of one's retirement account.  We have a nice list of attractive stocks with good valuations.  When the Gong sounds, we will get more aggressive.

ETF Update: More Flexibility, More Strategies

The diversity of new ETF offerings offers many more choices for the investor.  Back in the old days, say a year or two ago (!), only professional traders engaged in short-selling.  Only the pros or those with major business interests did commodities trading, and currency speculation or hedging.

It is not your father's market....

ETF Strategies

Going short the market has gotten a lot of attention in the last week.  Our regular readers know that we have also featured the deteriorating sector breadth and noted the rise in our strength ratings for "inverse" ETF's  Tom Lydon's excellent ETF Trends raises the bidding with this article about a "triple threat" to the market.  Tom cites three ETF's that are not just short, but leveraged shorts:

It's no wonder that some short ETFs have been popular with investors this year. Some of the strongest performers include:

• ProShares UltraShort Financials (SKF) , up 41.1% year-to-date

• ProShares UltraShort Health Care (RXD)  , up 30.8% year-to-date

• Rydex Inverse 2x S&P 500 (RSW) , up 18.3% year-to-date.

These are, of course, the ETF's that will decline the fastest in a market rebound.  We have been sticking to the single-weighted shorts, with a maximum positions size of 3 out of a possible 8 holdings.

Bottom fishing is a natural trading impulse to maximize return by guessing the bottom in a sector.  ETF trading makes this approach easier.  The idea is to look for a beaten-up sector that seems to have value.  Instead of detailed stock analysis, these moves often seem based upon "feel" or instinct.  We know several traders who have attempted to call the turn in financial stocks.  So far, every such move has been wrong.  Last week saw a number of additional downgrades for financial stocks.

One danger in a lazy approach is clear from this nice analysis by Saj Karsan.  He takes a look at the popular homebuilder "spider",  XHB.  He posits that one might think the group was attractive on a book value basis.  After looking at the components, he points out that one is getting plenty of retail and mortgage stocks, not just the builders.  Also, the best stocks on book value are not included.

Our Take

Any beaten-down sector will have a bottom.  Whoever predicts it on the right day may seem like a genius.  Since there are plenty of predictions, someone is sure to be right.

We prefer to find some catalyst, whether fundamental or technical.  We miss the first part of a rebound, but participate in big moves.

Weekly TCF-ETF Rankings

Our weekly ratings (more information at the end of the article) go from Thursday to Thursday.  Last week we noted that inverse ETF's were highly ranked and worth owning.  That position helped our performance last week.  The combination of oil, basic materials, and index shorts had a solid gain in a week where the market declined sharply.

The overall rankings remain similar, but some sectors are close to a "sell signal."

Here is the chart for the most recent trades and current ratings as of Thursday's close.  As one can see, financial stocks are firmly at the bottom of the list.

 

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.

ETF Update: Time for Inverse Index Positions?

It was a difficult week for investors, almost regardless of market sector.  As we have observed in our last several updates, a general deterioration in market sectors helps the investor get a good feel for the overall market.  Last week we wondered whether there was anyplace to "hide".  We noted that the inverse market sectors ETF's  were showing surprising strength.

Markets versus Sectors

Most ETF investors are interested in finding the best sectors.  The advantage of considering market ETF's and their inverses -- SPY and SH, DIA and DOG, QQQQ and PSQ -- is the ability to compare the overall market to individual sector performance.

Sector concentrations have a higher beta -- more risk and more reward.  It is unusual for a play on the overall market, long or short, to have more appeal than individual sectors.

Last week's emergence of the ETF index shorts was quite unusual, suggesting that we should both rank and invest in index ETF's along side our regular TCA-ETF universe.

This Week's Featured Sector: IEO

Our featured sector this week, still not matching KOL but worthy of a buy rating is the iShares ETF covering the Dow Jones Oil and Exploration Index (IEO).  The top ten holdings make up about half of the fund and the beta is about 1.5.

Tom Lydon notes that this fund will benefit from any step up in exploration.  In another article, he also writes that the actual payoff might be delayed.

It is an interesting choice, but perhaps not as exciting as we normally expect to see.  We are really poised and looking for a sector rotation.

Weekly TCF-ETF Rankings

Our weekly ratings go from Thursday to Thursday.  The performance gained from some short positions, as the table shows.  There is clearly a benefit from looking at index ETF's, as we suggested last week.

There will be a turning point, of course.  The TCA approach has a cycle factor for specific sectors, but it is not a "bottom-calling" method.

Here is the chart for the most recent trades and current ratings as of Thursday's close:

 

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.

ETF Update: Any Place Left to Invest?

Looking at market sectors is a great way to get overall perspective.  When sector breadth shrinks, as it has over the last few weeks, it is a warning.  Our weekly ETF update takes a time frame of about one month.  We are especially interested in being on the right side of big moves.  So should you!

Those with different time frames may reach wildly different conclusions. Those investing in bank stocks, for example, include both those who are looking a  year ahead and those thinking one week ahead.

Successful investing means knowing your time frame and your mission.

Our rankings resemble the TV reality show, Survivor.  The story is mostly about what is wrong.  Secondarily one may ask, "Is there anything left to buy?"

This week's featured sector reflects the circumstances.

The Featured Sector:  Environmental Services

Market Vectors Environmental Services ETF (EVX) is a mostly about waste disposal.  The top holding out of the 21 constituent companies is a little over 10% and the top four make up about 40% of the Amex Environmental Services Index.  There is some diversification, since the group includes both industrial and consumer waste disposal, as well as companies with other environmental services.

There has not been much commentary on EVX.  In our review of favorite sources we see only this comment from Gary Gordon.

The chart shows the performance over the last year or so, along with the buy and sell calls from our TCA model.  While we have had a "buy" rating since mid-April, there have been some recent losses.

The sector  performance is not at the outstanding level that we hope to buy.  It is more like a survivor.

It raises an interesting question for active traders.  If you owned this ETF, would you have stopped out on the recent decline?  What criterion would you use for re-entering?

Our own answers come from our TCA-ETF system.

Weekly TCA-ETF Rankings

It was a brutal week in the market, particularly if you measure (as we do) from Thursday to Thursday.  That includes last weeks down 400 day and excludes last Friday's rally.

Only six ETF's still qualify for a "buy."  The rest are in what we call the penalty box.  If we were to include both the long and short ETF's for the Dow, the S&P 500, and the NASDAQ, two of the three shorts would be in our rankings  We are considering including these ETF's in future articles.  Meanwhile, here are the survivors -- the top six in the rankings.

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.

ETF Update: A Nugget of KOL Defies Shrinking ETF Breadth

Our sector rankings for the week show two important themes:

1. Decreasing breadth. As of Thursday's close, the basis for this report, only ten of the fifty-one ETF's in our universe qualified for a "buy" rating.  (Please see the section at the end of this article for an explanation of our approach.)
2. The Market Vectors Coal ETF (KOL) defied the market trend.  It posted a small gain for the week and moved into the #1 position.

Friday's selling sent more sectors to our "penalty box" and also confirmed a "sell" rating on the DJIA.  The S&P 500 and the NASDAQ remain marginally positive, so our vote was "neutral" in this week's Ticker Sense blogger sentiment poll.

A Closer Look at KOL Fundamentals

Market Vectors Coal (KOL) was launched earlier this year.  It tracks the Stowe Coal Index -- 39 holdings, with 55% US representation.  The top ten holdings reflect about 60% of the index, but no single position is greater than about 8%.

Overall demand.  Steve Halpern at Blogging Stocks draws upon The Global Bull Market Alert newsletter to describe the strong case for coal demand.  He writes as follows:

...coal provides 25% of the world's energy and generates about half of the electricity in every state in the United States, except California.

Coal plays a key role in the production of steel, with approximately 70% of the global steel production depending on coal as a source of energy. And the price of coal has been soaring to record levels.

China play.  Halpern cites some key factors behind the current strength, including China's dependence on coal (80% of power capacity), disruptions in China from the earthquake, and reductions in supply from Australia due to weather.  Australia is the world's leading coal supplier.

Stock versus commodity price drift.  Steve Bernard at ETF Charts notes (as of a week ago) a disparity between commodity and stock prices for the group.  This is something to monitor, so check out his nice charts of both.

Overall ETF Selling

The general stock market pressure is reflected in the overall pattern of ETF's, as John Spence notes at MarketWatch.  John cites the weakness in home construction and the relative strength of commodity funds.

The same pattern can be seen in our rankings for this week, with the added benefit of our quantitative scoring method.  The report shows fewer attractive sectors for the coming month.

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.

ETF Update: Nuclear Takes the Lead

The Market Vectors Nuclear ETF (NLR) has taken the top position in our weekly sector rankings.  The top four holdings in this ETF constitute about 10% each, and the list drops rapidly to holdings of 5% or less.

Reviewing Our Mission

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 weekly trading.

We shall use this week's report to illustrate how fundamental investors can make use of the information.

The Fundamentals:  Why Nuclear?

Tom Lydon, an excellent ETF resource, says that the Nuclear Energy field is "poised for a rebound."  He points to last week's $1 billion deal where China contracted with Russia.

Gary Gordon, cited by Tom, picks up on three main themes supporting nuclear -- suppliers and consumers, momentum, and what he calls the 'Rule of 72.'  Check out his analysis for more detail.

Roger Nusbaum points to Japanese nuclear developments as part of a broader infrastructure theme.  It is an excellent article!

Using Our Rankings

When there are strong fundamentals, one can expect the trading to reflect buying interest.  This week's rankings show a strength for NLR at the 88.75 level.  The strength score can be readily interpreted as follows:

A score of zero means that the sector has an expected return equal to the market over a time frame of about  one month.  A score of 50 is one standard deviation above the norm, putting the expected return in the range of the top 1/3 of all historic sector returns over a one-month period.  Scores of 100 or above put the sector in the top 2.5% of all expected returns.

A second good way to use the rankings is to interpret the overall breadth of the market.  When a sector "fails" according to our technically-based analysis, it is in the "penalty box."  That sector does not have a "buy" rating, regardless of the strength measure.

At the moment, only 17 of the 51 ETF's are in the "buy" range.  This is significantly lower than ratings of the last few weeks, and is worth noting.  We use this information in our trading, and have moved our intermediate market outlook, reported on the TickerSense blogger sentiment poll, to neutral.

We summarized many of the issues in building a system and analyzing results in this article, What You Need to Know about ETF's, which has links to more specific discussions.

We shall revisit these topics as we analyze changes in future weeks.  Meanwhile, readers may find the rankings a useful method to consider the timeliness of their investments in the various sectors.  Here is this week's report, including our actual trades.  It covers a difficult time for the market.  Periodically we will update the overall results for a cycle of trading.

The Most Promising ETF's? Russia and Coal

Market Vectors Russia (RSX) and Coal (KOL) remain 1-2 in this week's sector ratings, although the order has switched.  Both sectors have strength ratings over 100, indicating that they are expected to perform in the top 2% of historical ETF returns over the next month.  (We have been showing the results of our sector model each week with a one-day delay.  Investors interested in more details can request a free report via email -- found at the top left of the page).

A Look at the Fundamentals...

The Market Vectors Russia ETF is a closet energy play, with nearly 40% exposure.  Tom Lydon at ETFtrends has a nice article on the relationship between Germany and Russia, leading to more modernization.  This has helped the RSX ETF.

When one wants foreign exposure, the ETF is often preferable to finding individual stocks.

On the coal front, Tom Lydon has another interesting analysis as he notes the following:

Market Vectors Coal (KOL) got another boost on Tuesday after the International Energy Agency reported coal will be the world's biggest energy source for the next quarter of a century. Since the fund's inception on Jan. 15 this year, it's up 30.8%.

Matthew Hougan at Seeking Alpha notes that the Coal ETF is near the top of the most successful ETF launches in 2008.

There is a lot of current debate about energy prices -- speculation or fundamentals?  The portfolio has significant energy exposure.  It is the nature of our method, allowing the market to guide our strategy.  This means a consideration of technical analysis.

...and the Technicals...

We are always interested in technical analysis of ETF's since our model has a technical basis.  Writing at Seeking Alpha, one of their featured technicians, David Fry, has some chart observations on RSX.  Take a look, and also enjoy his other ETF charts.


..and finally, the TCA-ETF System

As noted, the top sectors are even stronger.  Thirty-three of the fifty-one sectors in our universe have a "buy" signal, an improvement over the 27 from a week ago.

We are delighted to note the gains from two recent additions to the sector universe.  We continue to entertain reader suggestions about new candidates.

Displayed below is the current ranking, along with trades closed since the last update.

Bailout for Homeowners and Lenders?

Developments in housing remain crucial for the economy and for stocks.  Nearly any account of the housing situation includes reports of the number of foreclosures, the inventory of empty homes, and the potential ARM re-sets that may stimulate even more foreclosure activity.

Any help for distressed homeowners would help to shift the supply curve for homes.  This would suggest more stable prices and a lower inventory overhang.  Some have speculated that demand has been suppressed by the expectation of further price decreases.  If this argument is true, then the foreclosure bill might affect demand as well as supply.

The House has already passed a version of the bill under the leadership of Barney Frank.  The Senate Banking Committee is now considering a similar bill.  The Chairman, Christopher Dodd remains optimistic that a compromise will be reached.

The Administration is using a veto threat to affect the legislation.  Their position is represented in the Senate by Richard Shelby (R- Alabama).  Shelby, a former Democrat who switched parties years ago, is calling for more aggressive regulation of the Government Sponsored Enterprises (GSE'S) in the home financing business.  He is also concerned about bailing out the undeserving with taxpayer dollars.

Those in favor of the proposal think that the cost of the bill, perhaps $2 B or so, is easily justified by the benefit for the housing market and the economy.

Putting aside our own opinions on the legislation, we believe that the market would react positively to something helping out homeowners.  For this reason, it is important to watch the key players, especially Shelby.

Meanwhile, housing remains firmly at the bottom of the sector ratings.

TCA-ETF Update

There has been a lot of movement among the top sectors in the last few weeks.  While energy and natural resources choices remain at or near the top, we now also see some technology.  All of the financial sectors have again fallen out of the "buy" range.

The percentage of ETF's earning a "buy" signal is down to 53%, well off the recent highs.  The overall strength ratings are also not as high as in recent weeks.

Listed below is the weekly update.

Developing and Evaluating Trading Systems

Improved technology, more power.  We would expect this to be good.

In fact, more power can enable us to do exactly the wrong thing.

This happens all of the time with the world's most powerful computer, the human mind.  A year ago we reviewed analysts who thought the market looked like a replay of the 1987 crash.  This type of analysis crops up all of the time, often using old charts as evidence.  With the power to search among thousands of choices, picking the time frame, and adjusting the scales, the human computer can "prove" nearly anything.

Those developing computer-based trading systems face the same problem.  The modern software makes it easy to include many variables --- too many!

Some Helpful Illustrations

Bill Rempel missed the Kentucky Derby by a few days, but his story highlighting horse race handicappers is excellent.  A group of handicappers were tested, using gradually increasing amounts of information.  The extra data increased their confidence, but not their performance!  (Read the entire discussion.)

Bill discusses Occam's Razor and points out the importance of reducing the number of independent variables:

I use this paring down or pruning technique at work as well as when examining trading strategies or opportunities. My first question, when faced with complex models, has for a long time been “I wonder how many of those variables actually do most of the work?”

This is pretty convincing to us, since Bill sounds just like our own Vince Castelli.  It is easy to develop a model using all of the available data and lots of variables.  You will generate a perfect "post-diction" but not anything useful for prediction.

The result:  Over-fitting and over-confidence, a dangerous brew!

Unfortunately, consumers of system strategies, including a few big-time "gatekeepers" we have met, have become accustomed to seeing eye-popping (and unrealistic) results.  They apply an automatic discount, regardless of the methodology employed.

The TCA Model Applied to the S&P 500

For the purposes of comparison, the chart below shows our TCA Model (Trend, Cycle, Anticipation) as applied to the S&P 500.  Without giving away the store, we can say that the model uses a relatively small number of variables -- some designed to choose between trend and cycle, and others representing indicators for each.  Much of the power comes from advanced techniques for filtering and smoothing data, thereby improving signal to noise.  The chart below is not a back-test, but the signals actually used in trading during the last year.

The overall performance shows a gain of about 6% during a time when the S&P declined by a few percent.  It accomplishes this while reducing risk by staying out of the market for significant periods.

A key point is that the model gets the investor into the market to enjoy the big moves.  The cost?  There are some losses at times of rapid changes or churning.

Finding the big moves is very important.  Some traders have trouble joining in when the market has already made a move.  They are reluctant to "chase."  It is difficult to show gains when missing the big rallies.

Anyone interested in trading systems should join us as regular readers of The Rempel Report, where he updates and reports on several interesting trading systems.  One of these is similar to our own sector rotation approach.

TCA-ETF Update

Each Thursday (a day late this week) we share with the investment community a recent report from our ETF ratings.  We have been doing this in real time for eight months.  Our purpose is partly to gain visibility for the approach (free report available on request), but also as information for other ETF traders, and most importantly to provide a laboratory for others trying to develop trading systems.  We discuss the issues surrounding system development in many of the articles in this series.

As we noted last week, we have expanded the ETF universe, and we seek more additions.  Adding more targets is helpful, as long as they can be shown to have characteristics suitable for one's model.

The current ratings show some dramatic changes from recent weeks, and include one of the new ETF's, KOL.

Fishing in the Right Pond

Having a good trading method is only part of the problem.  One must also find the right trading "universe."

The original Turtle Traders learned this, and so should we.

We have been getting some good questions about our TCA-ETF system and why we chose the IShares universe that we have reported each week for many months.

Our criteria were logical and not overly restrictive:

• We wanted an open-ended ETF, since we did not want to be concerned with a possible discount or premium to NAV.
• We wished to avoid ETF's that were cap-weighted in sectors where a very few stocks would dominate.
• We wanted plenty of liquidity, so that the program could be scaled up as our assets grew.
• We also wanted enough trading action so that the slippage from our moves would not be too great.
• We needed enough data so that the model could be employed effectively.

The last point has been a big restriction, since we needed about one year's worth of data before a new fund could be added.  Unless there was a simulated history, we could not effectively employ a new ETF for nearly a year.  (At one point we were devising our own sectors and avoided this problem, but the ETF's are a popular and inexpensive alternative.)

Some Additions

In response to a suggestion from one of our smartest and most knowledgeable investors, we reviewed several of the Van Eck Global Market Vector ETF's to our trading universe. 

Since some of the prime candidates did not have the requisite trading history, although all other criteria were met, we asked Vince to revisit his methodology.  Without giving away Vince's secrets, let us say that his approach does a lot of filtering to reduce the signal-to-noise ratio.  He made some adjustments to achieve greater stability.  It is non-linear filtering that involves a "pathological time series."

The happy result is that we can now include ETF's with a four-month data history.  One of the new choices is currently in the top eight, so we will be buying it on tomorrow's opening.  The new ETF's will become part of our weekly report.  The new alternatives include alternative energy, gaming, coal, agribusiness, Russia, and nuclear energy.

An Invitation to Readers

We have offered our results as a general benefit to the community, reporting with a one-day lag on a weekly basis.  We now have a weekly program for investors as well as our sector partnership which trades daily.

We are open to suggestions about new ETF's that should be part of the universe.  Our experience has been that any ETF that meets our screening tests, improves long-term performance.  Feel free to make suggestions.