A Dash of Insight

ETF Update: Inverse ETF's and the Investor Toolbox

What role should ETF''s play in the investor toolbox?  Tadas Viskanta did a pretty thorough job of answering this question in a survey article last week.  Anyone interested in ETF investing should read the entire piece carefully.  It is very valuable.  (We are delighted to see this new dimension in articles from Abnormal Returns, one of our favorite sites).

The main arguments are that some ETF's are poorly designed.  Others (especially the leveraged long and leveraged short choices) are geared to short-term trading and do not deliver when evaluated over a long time.  The compounding of daily returns is not matched, because the fund rebalances to deliver short-term trading results.  Most investors do not understand this.

Many ETF investors do far worse than a buy-and-hold strategy.  Essentially, the ETF facilitates all of the worst psychological traits of the individual investor.

ETF investors need to understand these points.

We wish that Tadas had also covered the concept of intermediate term sector rotation  -- our own strategy, and also that of others.  Here are the key concepts:

1. Have a genuine system, not just market feel and hunches.
2. Test the system, because otherwise you will have no confidence.
3. Maintain discipline.  Accept short-term losses but control risk.

Our Approach

Our own approach meets all three of the key objectives.  We have a time frame of about one month.  This is not geared to day traders, and it also limits the trading costs of investors who want something more powerful than "buy and hold."  We consider Trends, Cyclical behavior, and we add a dash of Anticipation.  Since we do this with a universe of ETF's, we call it the TCA-ETF method.  We tested it on a universe of sectors not used by the developer.  We also reached into a different time frame.  This is the kind of testing that allows you to have some confidence in ultimate performance, so you are not second-guessing yourself every week.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

This Weeks' Spotlight

Each week we highlight the major moves in our rankings.  Most dramatically, we see the ascendancy of the index shorts.  While these short positions are partly covered by long sectors, the longs are not what we call "market" sectors.  They march to a different drummer.

The rankings for the inverse ETF's on the broad market -- SH, PSQ, and DOG -- reflect a negative outlook.  Our ranking list shows the rapid moves in these sectors.

Weekly TCA-ETF Rankings

Our weekly ratings go from Thursday to Thursday.  The performance (from Friday to Friday) lost about 3% as we transitioned to short positions.  The market had volatile and mixed trading, with rapid shifts from day to day.  This is the worst short-term combination for our system, and we lost ground to the S&P 500 which was down only slightly on the week.

We note the rise in health care sectors, and expect some mid-week buying in these groups.

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: Sectors Reflect a Deteriorating Market

At "A Dash" we believe that there is always a bull market somewhere.  Jim Cramer has made the statement famous, but it has always been the guiding concept for those following a sector rotation strategy.

Our own approach to finding the current bull market includes studying recent Trends, an established market principle, as well as identifying Cyclical behavior.  To stay a step ahead of the crowd, we use somewhat "faster filters" to add Anticipation to the mix.  We apply this to a universe of ETF's representing many important sectors, resulting in our TCA-ETF approach.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

This Week's Lesson

Each week we expect the model to provide a lesson about the market as well as a suggestion of what to buy.

Market.  The big story of the week is the rapid deterioration in the market.  According to our ETF rankings, the modest decline in the broad averages understates the breadth of the weakness.

Fresh Money.  The weak conditions suggest caution, and we have cut back on position sizes.  Those with new money to invest might look to utilities.

Focus on Utilities

We play the utilities via the iShares Dow Jones U.S. Utilities Sector Index Fund (IDU).  This is not very concentrated, with the top five holdings covering only about 30% and the top ten under 50% of the entire investment.  The P/E ratio is about 12.5, but here are the key metrics:

Beta:  .52
Yield:  4/3%.

It shows what the market seeks at this juncture.  Here is the chart.  To those of us who, like Art Cashin, are "cocktail napkin" analysts, this does not seem very exciting.

We own the sector, but it looks to us like there is plenty of work to do around the 70 mark. The model has a weak but positive signal.

Other Commentary

The ETF punditry is paying little attention to utilities.  Tom Lydon has a nice article on the new emphasis on nuclear energy.  He mentions IDU, and a couple of the companies in the group.

We think the main source of recent strength has more to do with a general defensive posture and a renewed emphasis on yield.  The market is showing skepticism about the prospects for near-term capital appreciation.

Weekly TCA-ETF Rankings

With only 11 of our 57 sectors are in the "buy" range, we have a very weak overall picture.  All of the broad market ETF'S are in the penalty box.

We were down over 5% on the week, losing 2.5% to our benchmark, the S&P 500.  While the ratings below show the model signals, we are actually even more conservative, about 50% invested.  (Friday's ratings were even weaker than those listed below).  We always hate to lag the market, of course, but the model has kept us invested for a pretty good overall run.  There were plenty who missed the entire move, calling it a "sucker's rally."  Paying attention to your system is important.

Based upon the model signals, we shifted to a neutral position in the Ticker Sense Blogger Sentiment poll.  This means that there is little we find attractive, but not a strong risk/reward case for going short.

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: Transports Challenge the (double?) Top

Some market analysts are "bottoms-up."   They pick stocks whatever the market.  Others are "top-down", starting with broad macro themes.  Both approaches can lead to winning results, but there is another helpful perspective:  Market Sectors.

The changing behavior of market sectors helps to reveal broad themes and opportunities.  Our system for doing this reflects the Trend, considers the Cycle, and adds a bit of Anticipation.  Since we look at a universe of ETF's, we call it the TCA-ETF model.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Weekly Market Overview

The sector approach is especially good for getting perspective at the start of a new week.  This week there are three interesting themes.

First, the weak dollar plays now show a mixed picture.  Energy has gotten weaker, and gold dropped rapidly in the rankings.

Second, there is more strength and diversity at the top.  There is greater strength in technology and in all of the broad market ETF's.

Third, the big ratings move for the week came from transportation, this week's featured sector.

Spotlight on the Transports

We track and trade the transportation sector via the iShares Dow Jones Transportation Average Index Fund (IYT.  It is pretty concentrated with 43% of the fund in the top five stocks and over 2/3 in the top ten.  The P/E is about 17 and the beta about 1.2.  Those numbers are pretty high if you think the economy is going much lower, or pretty low if you think we are near the bottom of the economic cycle.

The fund emphasizes railroads, package delivery, and trucking.  Airlines are included, but make up only 4% of the holdings.

Let us start by looking at the chart, since some of the pundits have a technical opinion.  For those of us from the Art Cashin school of "cocktail napkin" technical analysis, it appears that the group is doing a good job of fighting resistance at the 60 level.  The initial risk looks like 53 or so.  The initial reward is more difficult to determine.

Expert Commentary

Each week we search the top sources on ETF commentary to see if anyone else is highlighting our featured sector.  We also augment this by looking for information on the underlying themes and specific stocks.

This week, the results are pretty thin, suggesting that few are interested in this group.  Let us look more closely.

The prolific David Fry mentions IYT in his Friday outlook.  He sees a mixed picture, but you should look at his typically nice chart and specific commentary.

The Trading Goddess wants to see a breakout before buying.

From the macro perspective, Barry Ritholtz reminds us that truck tonnage is down.  He sees no "green shoots" in the transports.

The biggest negative comes from technical analysts like Bonddad who see a double top.

Our Take

As contrarian investors, we always find it interesting when our trend-following method finds a sector that other pundits do not seem to like.

We also note that many analysts are too quick to conclude that rising fuel costs are bad for the entire group.  Many trucking companies can pass on fuel price increases.  The package companies do so with a delay.  The railroads are advertising fuel efficiency.  The airlines make up only a small portion of the group.

It is possible that the easy conventional wisdom about fuel and transports has concealed an interesting opportunity.

We are in the sector, but regular readers know that this can change quickly.

Weekly TCA-ETF Rankings

With 44 of our 57 sectors are in the "buy" range, we have a strong overall picture.  We also have positive ratings for all of the broad market ETF'S.

We were up slightly on the week, with no major change versus the S&P 500.  We like the additional diversity in our current position.

Based upon the model signals, we continued our bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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: Chip Stocks on the Move

Our ETF rankings provide several interesting insights this week.

• Weak dollar plays still predominate;
• The overall market looks healthier; and
• There are some surprising new entries to our "top eight."

We'll talk about the featured sector first, and catch up with other conclusions in our weekly trading review.

Background

Each week we look at a universe of 57 ETF's with special attention to the Trending and Cyclical behavior of the sector.  We also add a touch of Anticipation, so we call it our TCA-ETF model.  The rankings help us see broad sector trends, as well as providing a useful perspective on the overall market.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Featured Sector:  Semiconductor Stocks

In our universe we use the iShares S&P North American Technology-Semiconductors Index Fund (IGW) to represent the chip stocks.  One reason we like this alternative is that there is only 36% concentration in the top five holdings.  As one would expect for a tech sector, the P/E ratio is nearly 25 and the beta about 1.25.

We understand that the P/E will seem high to many readers.  It is important to remember that at economic troughs, cyclical stocks often have a high P/E.  The real question is whether this is the trough.

IGW moved from #33 to #7 in one week.  Let us take a look at the chart.

We never know exactly what the model "sees", but looking at hundreds of charts is like an education.  There is potential for the low 40's, it would seem.

Other Comments on Chip Stocks

Each week we survey the other ETF experts to compare our opinions.   Most have been pretty slow to pick up on chip sector.

Tom Lydon takes a look at this sector as a leading indicator for the market in general.

Some share our viewpoint that the rise of IGW shows important overall breadth in the market advance.

Some see chip stocks as winners even when other sectors decline.

There is not much providing real focus on this group, but we own it.

Weekly TCA-ETF Rankings

With 46 of our 57 sectors are in the "buy" range, we have a much-improved picture from last week.  (21 of 57)  We also have positive ratings for all of the broad market ETF'S.

We were down about 0.6% in our weak dollar plays last week, while the S&P 500 was up over 2%.  This can happen when you are seeking uncorrelated gains.  The position is a bit more diversified for the coming week.

Based upon the model signals, we moved from neutral to bullish in our position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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: The Independence of Agriculture

One quest for the investor is to discover long-term trends.  The idea is to match investment objectives to the time frames of likely developments.  As long as one is willing to ignore the day-to-day results, this approach makes sense.  Of the many who find this attractive in theory, few are willing to stay the course.

Some months ago, a client asked us to set up a long-term portfolio.  He wanted market exposure, and he wanted edge.  He did not want active trading.  We always have ideas about long-term plays, and we were not surprised by the question.  This is not the occasion for our entire answer, but we can state that agriculture was part of the portfolio.

Before turning to this week's featured sector, let us consider what other information can be gleaned from our weekly sector rankings.  Each week we reveal our own ratings (with a one-day delay) for a universe of ETF's.  We develop the ratings  by looking for a combination of sector Trends, Cyclical moves, and a touch of Anticipation.  Since we apply this system to a selected universe of ETF's we call it the TCA-ETF model.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

We are not recommending that readers make trades based upon our weekly report.  It is intended as a news supplement to your own analysis.  Those who are serious about following the method can do better through our formal management programs.  We are just trying to be helpful with the free information.

The conclusions from this week's list are similar to those we reached last week.  The overall market is not strong.  The leading sectors all benefit from a weak dollar, with emphasis on energy and foreign stocks.

Focus on Food

If there is a single known element in the worldwide demand picture, it would be food.  World population is growing.  Many developing countries may be expected to build stronger economies.  Companies that provide agricultural products and services benefit from these secular trends.

We invest in agriculture via the Van Eck Global Market Vectors Agribusiness ETF (MOO).   The fund tracks the DAXglobal(SM) Agribusiness Index (DXAG).  It has about 50% US exposure.  Chemicals (fertilizers, etc.) are the top holdings, constituting 44% of the fund, but agricultural operations and equipment are also important.  The top five companies make up about 40% of the fund and the top ten constitute 2/3.  The P/E ratio is about 12.5.

An attractive feature of MOO is the potential for independence from the general market.  While strong markets can take all stocks up or down, during a period of consolidation there is a better opportunity for sectors that are not strictly tied to other market themes.

For those who like to compare their own chart reading with the model, here it is.

Other Comments

We regularly seek out expert opinion on the top choices from the model.  David Fry sees MOO as bumping up against resistance in a weekly chart he shows here.

We also like this article at ETF Grind.  It shows the potential for some sectors to "decouple" during a recession in developed countries.

Weekly TCA-ETF Rankings

Only 21 of our 57 sectors are in the "buy" range, the strength is dropping dramatically for most.  The index ETF's are all in the penalty box.  It is a weak overall picture, but not yet bearish.

Despite our "neutral" posture, the daily portfolio had a great weak, gaining over four percent and beating our benchmark S&P 500 by more than 50 bps.  We were fully invested in energy and other weak dollar plays, as well as MOO.

Based upon the model signals, we continued our neutral position in the Ticker Sense Blogger Sentiment poll. 

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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: Hidden Correlations in Sector Choices

Here at "A Dash" we analyze many different investment approaches.  In our financial management we follow two basic methods:

• A fundamental value analysis.  We are normally fully invested, but can back off a bit in certain circumstances.  We have a method for finding edge, based upon our own set of key indicators, and call it our Great Stocks program.  For shorthand, we call it the "Jeff model."
• A sophisticated computer model that analyzes a universe of ETF's looking for emerging Trends, Cyclical behavior, and including a touch of Anticipation.  We call this the TCA-ETF approach, and call it the "Vince model" after its creator.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

The Vince model has had a nice run, but Jeff is still ahead on the year.  It is a friendly competition.

How to Learn from Models

When we do our analysis on the fundamentals, we always pay attention to the TCA-ETF results.  You can do the same.  The way to do this is to make your own decisions, but then to check the ratings to see what the "expert system" analysis tells you.  This is mostly technical, an indication of what is likely to work -- the market verdict, so to speak.

Let us take a look at this week's ratings for an important lesson in using this information.

Hidden Correlations

This week's ratings, listed in full at the end of the article, include energy holdings, alternative energy, and foreign country ETF's.  At first glance, it seems like this is a diverse portfolio.

In fact, there is a common theme.  During the last week there was a major concern about the rating for sovereign debt and also the value of the dollar.  If one thinks about this, the sectors are all keyed to the dollar.  Commodities are dollar-denominated, and foreign ETF's link both to the dollar and commodities.

Briefly put, your apparently diversified portfolio is actually highly-correlated to dollar weakness.

Commentary on Dollar Weakness

There were several perceptive commentaries on the dollar and the effects.

The best analysis was from Dr. Brett (one of our featured sites), who wrote on May 20th as follows:

With low interest rates and rising national debt, the dollar is not as attractive as a currency, with several countries expressing interest in further diversifying their reserves. With the Fed contemplating further "quantitative easing", the market fears that the dollar printing press will be working overtime. That is lending support to commodities denominated in dollars.

And again two days later, he emphasized inter-market effects:

Could we be looking at inflation sooner than expected? If so, that would have important implications for Federal Reserve policy, interest rates, commodities, and the prospects for sustained economic recovery.

There was also commentary from mainstream media, but without all of the implications.

Our Take

When we see these hidden correlations we become more cautious and reach for some diversification.  If we have sectors that are rated a bit lower, but not playing for a weak dollar, we include those in our portfolio.  It is important not to follow one's model in a blind fashion when there are reasonable alternatives.

Weekly TCA-ETF Rankings

While 33 of our 57 sectors are in the "buy" range, the strength is dropping dramatically for most.  The index ETF's are weak, with the Q's in the penalty box.  It is a weak overall picture.

The daily portfolio had a great weak, gaining almost 6% versus 0.5% for the S&P 500.

Based upon the model signals, we shifted our long-standing official bullish position to neutral in the Ticker Sense Blogger Sentiment poll.  Sorry for the delay in our update, normally done on the weekend.  (Even the old prof takes some time off, on occasion).  Those subscribing to the weekly report get the information in advance via email.

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: Gold Mining Shines in a Tough Week

Last week's market action has some important and interesting messages.  We see rapid sector rotation, with a dramatic fall in some of last week's leaders and soaring ratings for new choices.  The overall market rating is mixed -- still bullish, but lacking the strength of recent weeks.

We look beneath the overall market averages to find sector strength in our universe of 57 ETF's.  The strength may be momentum-based, reflecting recent Trends, or it can represent part of a Cyclical pattern in the sector.  The process adds a touch of Anticipation, so we call it the TCA-ETF system.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Falling Sectors

Home Construction (ITB) plummeted from #4 last week to #51 and a place in our "penalty box."  Networking fell from #6 to #44, and also went to the penalty box.  These are extremely rapid one-week moves.

Market Averages

While the model retains bullish ratings on the S&P 500 and the Dow, the Q's are in the penalty box, as is the inverse ETF, the PSQ.  This is a neutral rating on the Nasdaq.

Spotlight on the Gold Miners

The ratings star of the week was the Market Vectors Gold Miners ETF (GDX), shooting from #46 to #5 in our ratings.  We last featured GDX in November.  That article pointed out the low concentration (37% in the top five holdings), the heavy Canadian exposure (67%), and the low correlation with the S&P 500.

Part of our analysis was the advantage of taking gold stocks rather than the metal.  We are not going to repeat the entire argument, so take a look.

Here is the chart.

Fundamental Analysis on Gold

There are several distinct viewpoints on the current attractions of gold stocks.

• One camp predicts that current government policies will inevitably lead to inflation.  Tom Lydon summarizes those views and some alternative investments.
• Maoxian points out that the astute hedge fund manager, John Paulson, has been accumulating a gold position, including GDX.
• James Kostohryz takes a different viewpoint, although he still sees the potential for short-term gains.  He writes as follows:

...gold is moving from being traded as “safe haven” play and is gaining a bit of traction as a “reflation play.” Notwithstanding, it is important to note that even within the context of the broader reflation play, gold and gold stocks have badly underperformed other commodities and commodity stocks.

I do not think gold will rally very far based on concerns about inflation. The reason is simple: The arguments offered by gold bugs for hyperinflation or high inflation, are empirically and even theoretically unsound. There is minimal risk of significant inflation occurring any time within an investment horizon that can be considered to be highly relevant to the market (1-2 years). Thus, as the data roll in, and this reality sinks in, gold will lose its appeal as a supposed inflation hedge.

It is always interesting to see divergent viewpoints and explanations.  For the moment, we are once again buyers of gold miners via GDX.

Weekly TCA-ETF Rankings

45 of our 57 sectors are in the "buy" range.  While a few sectors have extremely strong ratings,  the overall picture is much weaker than it has been in recent weeks.

The daily portfolio lost about 9 percent on the week, with the S&P 500 down about 5 percent.  This reflects the rapid nature of the rotation, and the fact that the system does not call "tops."  We do exit when a sector moves into the "penalty box." 

We traded out of two positions on Friday, the day after the regular ratings update.  There is a reason for publishing this as we do.  The ETF Update is designed as news information -- something to augment the trading ideas of our readers.  For accounts that we manage, we run the model at least twice every day.  Even for those in the weekly programs we may adjust at mid-week.  Those who really like the concept should call us to discuss our program.  We are not suggesting that people should read our weekly ratings and make their own trades, strictly on this basis.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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: The Energy Advance

There has been an interesting and dramatic shift in sector leadership.  The financial ETF's, while still in our 'buy' range, moved lower in the rankings as markets awaited the results of the government "stress tests."  Meanwhile, the interest in nuclear energy that we noted last week has broadened to include a variety of energy ETF's.

The model also shows continuing strong ratings for most sectors, encouraging a bullish stance on the market.

Background

Each week we report results from TCA model, which follows both Trends and Cycles while adding a touch of Anticipation.  We currently use a universe of 57 ETF's include three index inverse funds.  The ratings give an interesting perspective on the overall market as well as specific sectors.  We hope that readers find this an interesting supplement to their own analysis.  We are always interested in suggestions for ETF additions, and expect to amend our universe in the near future.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Oil and Gas Exploration (IEO)

Our featured ETF this week is the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO).  The fund is strictly focused on energy and production stocks.  The top five holdings make up 37% and the top ten 56%, so it is not overly concentrated.  The beta is about 1.  The P/E ratio is about 11, reflecting continuing skepticism about oil and the economy.

The sector has made a big move from the March bottom.  Technical analysts might have trouble finding specific resistance in the chart.  IEO made the biggest weekly move in our model rankings, going from 30th to 7th in our rankings.  Here is the chart.

Fundamental Analysis and Comment

Much to our surprise, there was little attention paid to the strength in IEO.  Perhaps we will see some commentary during the next week.  Those looking at energy in general were pretty skeptical.  This analysis from Marc Courtenay is typical:

For most of us and myself included, a sustained rise in energy prices seems hard to justify. Short of some sudden and unanticipated disruption in supply, I would expect energy prices to top out in the next two weeks and then start heading down to the lower end of the range.

"There's shock and disbelief that oil and gas can defy the normal historical reactions to supply and demand," analyst Phil Flynn said in a client note. "Traders are calling me and are stunned with no idea of what is happening."

Energy Fundamentals

Despite the lack of ETF commentary, there are some bullish signs for energy sectors.

Pumps highlights three factors:

1. Summer driving season has helped take fuel prices to new highs.
2. A pick up in China's manufacturing which "...is generally a good indicator of increasing energy demand."
3. Growing support for the idea that world oil production has peaked, most recently from Raymond James.

The energy stocks that we follow have P/E multiples suggesting little expectation of economic improvement, OPEC cuts, or weather effects.  This may be the rationale behind the evidence picked up by our model.

Weekly TCA-ETF Rankings

51 of our 57 sectors are in the "buy" range.  Several sectors have extremely strong ratings.  The overall picture is even stronger than it has been in recent weeks.  The overall strength ratings have helped to keep us fully invested through the extended rally.

The daily portfolio gained 5.6% on the week, slightly trailing the S&P 500.  Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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 -- An Explosive Move Ahead?

Each week we use our ETF rankings to gain insight into current market trends and potential turning points.  While we look at model output at least twice a day, trading as necessary, the weekly assessment is a good time interval to consider sector moves.

The approach combines trends and turning points derived from cycle analysis.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

This week there are three interesting themes.

1. Financial sectors, after more than a month in the limelight, have dropped out of our top eight sectors.  While the ratings are still in the "buy" zone, we hold only the top eight for the daily program and the top six for weekly programs.
2. Commercial REIT's (ICF and IYR) and homebuilders (ITB) remain at the top.  There are many stories about REIT refinancing difficulties.  We covered this carefully two weeks ago.  The strong players, heavily represented in the ETF, are buying cheap assets.  It is a complex story.
3. Nuclear Energy's strong move from #27 to # 6 in our rankings.  We have not featured this sector for almost a year, so it will be today's focus.

Nuclear Energy

We trade nuclear energy based upon the Van Eck Market Vectors Nuclear Energy ETF (NLR).  As they note, "The Nuclear Energy ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal® Nuclear Energy Index."  Restricting holdings to companies with a market cap over $150 M, the index covers seven different nuclear sub-sectors.

The top five holdings make up 40% of the fund and the top ten are 65%.  84% of the fund is related to mining, nuclear generation, or infra-structure.  US holdings make up only 25%.  The beta is 1.18, but the correlation with the overall market is only .64.  Finally, the P/E ratio is about 17, pretty reasonable for this type of sector.

Here is what the model sees:

There has been a long period of basing and a break past the recent high.  To consider possible targets, let us look to some other voices.

Sector Commentary

Brett Steenbarger also does a valuable weekly sector update.  His themes are a bit broader than ours, but always worth reading.  Like us, he notes the weakness of financials and some relative strength in energy.

Tom Lydon cites the key problem for the nuclear industry:  cost.  The lead time is long.  If we only get interested in nuclear when fossil fuel prices are high, nothing will get done.  Read the entire article to see his charts and alternative nuclear plays.

Trends I'm Watching reports the move in NLR.  Readers wanting another list of recent movers for comparison may find this interesting.

Paul Ausick notes that Obama Administration policy is crucial, along with energy prices, if nuclear is to make a move.

Weekly TCA-ETF Rankings

37 of our 57 sectors are in the "buy" range.  Several sectors still have extremely strong ratings.  The overall picture is slightly weaker than it has been for the last several weeks, but we remain fully invested.

It was a bad week for the system, breaking a nice winning streak.  We lost a little over 1% while the market gained over 1%, for a net loss of 2.5% against our benchmark.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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: What is Working?

At "A Dash" we combine fundamental analysis with system trading.  We monitor and report economic information, with a special emphasis on implications for corporate earnings.  Our trading system provides a reality check on the markets.

We have found that looking at the charts of many different sectors is a great way to get a feel for the overall market, as well as how specific sectors are performing.  Our system includes Trend, since that is the most important technical consideration.  We also attempt to include a Cycle for specific sectors, and we add a touch of Anticipation.  Putting these together is the basis for our TCA-ETF method.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

The Current Picture

We provide the ratings not as specific trading advice, but more as a basis for checking your own analysis against a scientific method.  To illustrate, let us look at this week's ratings.

• ICF, our featured sector last week, took a big hit on Monday.  We noted that it was a key point for technical analysts.  There was plenty of negative commentary from reports about stress tests.  The model filters drove through this reaction and ICF remains our top-rated sector.  It bounced back nicely from Monday's selling.
• The overall market analysis remains bullish, although more sectors have dropped into the "penalty box", where we do not recommend buys.
• The Home Builders, ITB, have bounced back into the top group.

It is a complex story.  Those who watch the individual sectors have a better overall market feel, and a better sense of what is working, and what is likely to work over the next thirty days.

Here is the chart showing the ICF bounce from the Monday "news."

 

And here is the chart on the home builders, ITB.

Other ETF Comments

John C. Ogg notes the reaction to home builders from the recent housing data.

Trends I'm Watching  also notes this pop.

Zero Hedge sees the same data, but offers a note of skepticism.

Our Take

The story about financial sectors is complicated because of the debate over the "stress tests."  This bears watching, and it is our main current focus.

There has been plenty of misinformation, with speculation about the stress test results.  Many traders are very skeptical.  We maintain that  the "leaks" about this story are incorrect.  The mainstream media stories have looked at the methodology and speculated about the results.  We expect the actual announcement to be a positive for the market, supporting the model recommendations.

Weekly TCA-ETF Rankings

41 of our 57 sectors are in the "buy" range.  Many sectors still have extremely strong ratings, although some  ETF's have moved into our "penalty box".  This designation means that the sector cannot qualify as  "buy" on technical grounds.  You can think of it like a sell stop, only with a more complicated basis.

It was another good week for the system, gaining over one percent while the S&P 500 declined a bit.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this 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.