ETF Update: Back in the Chips

The remarkable market rally has carried the broad averages back to the highs of recent months.  Our Sector model shows very broad strength with semiconductor stocks are leading the way.

Market Breadth

Each day we look at a universe of ETF's representing many different market sectors, both foreign and domestic.  Last week we introduced an expansion of this list to include 277 different possibilities.  The model considers sector Trends, a long-time staple of stock analysis.  It also looks for sector Cycles and includes a fast filtering method to enhance Anticipation.  Putting these factors together, 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).

The breadth in the expanded universe is quite impressive, with 96.4% showing a positive rating.

Spotlight on Semiconductors

As we noted in our last feature story on the group, 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.  In early June we wrote as follows:

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.

The recent strength has been partly based upon multiple expansion.  That has reflected improved earnings from companies like Intel.  (INTC)

In addition to these fundamental reasons, the sector seems to have broken through resistance, as Gary Gordon notes.  You can readily see the great recent strength.

 

In our expanded universe we have also provided ratings for other semiconductor ETF's.  The charts are very similar.  In future articles we will discuss our process for selecting which to buy.  Mostly this involves liquidity and the ease of trading in and out of positions, but there are a few other factors.

Weekly TCA-ETF Rankings

With 96% of our sectors in the "buy" range, we have a vastly-improved picture from last week. We continue to show positive ratings for all of the broad market ETF'S.

We were up about 3% last week as we resumed a fully-invested position.  This trailed the S&P 500 by about one percent.

We are still getting a feel for some of the very large moves in the rankings.  The sectors where we do not have an entry date, FBT for example, reflect specific concerns.  These may be related to liquidity or occasionally other factors.  We provide the rating anyway as news information.

Based upon the changed 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.

Comments

[Options Swing Trader Tony]

Ok so, for example, how would you trade SMH, what approach would you take for larger accont sizes ? I'm looking for your preferred style on SMH that you feel is worth your time and money vs. trading something else.