ETF Update: Back to the Home Builders

Sometimes the news moves faster than the system.  The announcement this weekend of the Fannie/Freddie bailout will change prospects for the overall market as well as specific sectors.

The Street has been anticipating a plan, and that may have influenced some "bottom fishing" in the home builder stocks.  This helps to explain our ratings -- a strange mixture of energy positions, financials, and the inverse NASDAQ short, PSQ.  (For new readers, there is a further explanation of our approach at the end of the article.)

Even when one's methods include some anticipation, as we have in the TCA-ETF system, one cannot guess which week will produce the government response to a crisis.  It could have been three weeks ago, or it might have dragged on until after the election.  The real point of clarity is that the market hated the uncertainty, as we saw in last week's trading.

Dow Jones U.S. Home Construction Index Fund (ITB)

We featured this index a month ago, but it later fell out of the top rankings.  Here is the basic information on the fund:

Our representative for the home builders is the iShares fund, Dow Jones U.S. Home Construction Index Fund (ITB).  It includes the large U.S. construction companies, with the top ten making up more than half of the fund.  The reported P/E ratio of 17 does not seem especially cheap.  In a cyclical name like ITB, however, the P/E ratio is less important than where we are in the cycle.  Companies will always be cheap on a P/E basis at the top of the cycle and apparently expensive at the bottom.

Tom Lydon notes yesterday that the home builders were showing strength.  Charles Kirk's excellent daily commentary also observed on Friday morning the strength in Centex (CTX ) and the hedge fund rumors.  Doug Kass and Jim Cramer at TheStreet.com have also been discussing possible plays to benefit from a bailout, which they both anticipated.

Having said this, most observers felt that there was plenty of time for investors to wait for signs of a bottom rather than guessing exactly when government action would occur.  We agree.  There is plenty of time to profit.

Weekly TCA-ETF Rankings

This week was as bad as it gets for the system, checked against our long-term testing.  When Gustav missed the key refinery and drilling areas, it started some dominoes falling.  The immediate speculation came out of energy prices -- but there was more.  Apparently there were commodity hedge funds which had highly leveraged positions, large enough that they immediately began liquidation.  This led to further hedge fund selling.

As we have noted, many of the energy stocks should not be that sensitive to the front-month spot price of oil.  The fundamentals are based upon long-term drilling, exploration, and service needs.  Since many fund managers and investors use the ETF's as a proxy for oil prices, the reaction is sometimes exaggerated.  This may well provide an excellent opportunity for investors with a longer time frame.

Meanwhile, the good news for the country (and regardless of one's investment position we must always be thankful when people and property are not harmed) was bad news for the portfolio.  Obviously, this could have had a very different result.

This is important to recognize.  Many investors develop perfectly back-fitted systems that catch every turn.  In practice, one must realize that big rewards, as we have picked up in the last few months, also carry a risk.  Having confidence in the long-term prospects of one's method is the key to riding out the adverse swings.

We expect the rankings to change rapidly as the Fannie and Freddie news gets reflected in new sector rotation moves.

Using the model as our guide, we continued our recent "neutral" forecast in the Ticker Sense blogger sentiment poll.

Listed below are the week's rankings and our trades:

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.

Comments

[bucket trucks]

The construction industry is not doing as well as it used to. We all need to do our part to help the economy. forestry trucks

[Schumacher Homes]

I don't think there is any time left to profit now. I am taking all of my money out of the stock market and waiting for this semi-depression to pass.