ETF Update: Let's Network!

Each week we write about the market from the perspective of an ETF buyer.  In order to do this, we examine the weekly ratings from one of our trading models.  This particular method looks not at the overall market nor at individual stocks. The focus is on market sectors, as represented by ETF''s.  Since it considers both Trend and sector Cycle, with a touch of Anticipation, we call it the TCA-ETF model.  Around our office, it is often called the "Vince" model, after its creator.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

This is a healthy exercise for many reasons.  In our weekly update, we try to highlight something that the average investor can use, even if he/she is not an investor in our program.  Here are a few themes that we have covered during this series.

• System Traders.  This is for you.  We often highlight the issues involved in building and following a system, even when things seem to be going wrong.
• Sector Investors.  Our update is where you can compare your own conclusions with those from a professional model.  Since we do a lot of fundamental analysis of stocks and sectors, we do this ourselves.
• Stock Pickers.  It always helps to start with a stock in a favored sector.
• Current Trends.  We try to compare our ETF choices with market fundamentals and current trends.

Each week we identify a featured sector and examine one of the themes.

Networking Stocks Break Out

In a dramatic move last week, the S&P North American Technology-Multimedia Networking Index Fund (IGN), moved from the 10th spot in our rankings to #1.  The move triggered the model last Friday (April 3rd).  This iShares Fund has the following characteristics:

• The P/E ratio is about 21.  This is pretty high if one expects no growth, or pretty low if one sees an earnings rebound.
• The top five holdings (GLW, RIMM, QCOM, CSCO, MOT) constitute 41% of the holdings and the top ten make up 63%.  This is pretty high concentration, making it important to look at the top stocks.
• The beta for IGN is 1.33, showing volatility when compared with the overall market.
• Some of the top holdings have been rallying on strong fundamental news, as noted here.

The Model Perspective

Readers sometimes ask whether it is "too late" to enter a new position.  We shall write more about this soon.  The model interpretation is based upon many years of data.  Anything in the positive range shows better-than-expected future performance.  A rating of 100 is two standard deviations above the average for the next thirty days.  Finally, the model makes most  of its profit on big breakouts.  What about now?

It is always interesting to look at a stock chart, a snapshot of what the model sees.  Where would you set an upside target?

Others Viewpoints on IGN

Gary Gordon sees networking as a beneficiary of tech infrastructure spending under the Obama administration.  He liked IGN as far back as October, 2008, and still does.  He addresses the question of entry timing as follows:

The truth is... yes. You can probably get a more attractive entry point. That's a prediction, of course. In essence, I would expect that the 5-week bear rally might hit some hefty headwinds here in earnings season.

However, the basic premise is still quite sound; that is, the iShares Networking Fund (IGN) will benefit from the hundreds of billions being spent to increase broadband access for schools, healthcare professionals, libraries and hospitals. Moreover, President Obama strongly believes that America's success is tied to our country's leading internet players. And that translates into the helping hand of government in an era of seriously checked capitalism.

In his regular technical analysis, David Fry calls IGN a "leading subsector within tech."  (scroll down to see his multi-year monthly chart.)

Weekly TCA-ETF Rankings

All of our sectors except the inverse ETF's and gold stocks are now in the "buy" range.  Many sectors have extremely strong ratings, with a rotation from financial stocks to several other positions.  We really like this kind of action, with sector leadership changing each week.

It was another excellent week for the system, gaining about 2.6% (after a bad start) and beating the S&P by a point.

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.

Comments

[oldprof]

Mike C -- The model is making a thirty-day forecast, but that does not mean we hold the positions for thirty days.

We have a fresh model run every day, so we are always deciding which ETF's look best for the next 30 days. In the daily program, we adjust positions every afternoon.

In the weekly program, we sync up on Monday, but make more frequent changes if indicated. We do this to keep trading frequency and commissions low.

The result is that positions might last only a day in the daily program. That usually means that other sectors have moved higher. On other occasions, we may hold a position for many weeks.

I hope this clarifies, and thanks for asking!

Jeff

[Mike C]

What is the anticipated holding timeframe on the model or is it variable depending on when the signal reverses?