ETF Update: Spotlight on China

When the market starts to move, there are always interesting patterns in the sector ETF's. Looking at the charts of various sectors provides market "feel." The ratings from our TCA-ETF model (Trend, Cycle, and a touch of Anticipation) help to draw attention to the big moves.

Even though the major averages declined over the course of the last week, the model picked up some interesting opportunities. Our sector ratings recommended dumping the inverse ETF's and also highlighted some new opportunities. The resulting changes had us better prepared for yesterday's "Obama rally." (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Spotlight on China

We track China via the iShares FTSE/Xinhua China 25 Index Fund (FXI) . This measure of the top Chinese stocks available to individual investors has a P/E ratio of 11.4, and a beta of about 1.7. Let us begin with the stock chart (click to enlarge, below), summarizing what the model is picking up. Our entry date was 12/2/08. FTSE/Xinhua China 25 Index Fund:

Others have also noted the China opportunity.

Brett Steenbarger observes that "China's ETF (FXI; top chart) has vaulted impressively above its November lows, now leading most world indexes in intermediate-term relative strength."

Bear Mountain Bull sees a similar opportunity as does chart watcher David Fry.

Bill Luby, one of our featured sources, sees the same opportunity.

Gary Gordon focuses on the fundamental implications of Chinese policy moves. While a bit skeptical, he also notes buying from astute investors like Mark Mobius.

The attention to this sector is a dramatic shift from recent weeks, where the ETF commentaries have been universally negative.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, December 4th. GDX maintained the leading position with a very strong rating. FXI moved strongly into the #2 position, while several other sectors qualified as "buys."

In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors.

We do not buy a sector that is in Vince's "penalty box." One can think of this as similar to a trading stop. It means that trading in the ETF has violated certain technical criteria. To assist readers in following this, we have added a field, showing which sectors are in the penalty box. The overall number of sectors in the penalty box is also an important read on the overall market, influencing our overall posture.

Based upon the current ratings, we moved from bearish to neutral in the Ticker Sense Blogger Sentiment poll : (click to enlarge)

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

[DavidtheGrim:]

China still has potential in growth although beit smaller than recent years, it is shedding companies by the thousands and still continues to this day and will carry on shedding until supply meets demand.

I suspect China will be involved in dirty wars with it's base rate, cutting when no need to weaken its currency and to win over export with the western world in particular USA, could start a host of new problems with trade relations there.

Estimates for general growth range between 6-9% for 2009 and at present global situations a reasonable return with the right ETF or Chineese home stock picks (if your brave enough that is).

DTG

2008 Dec 09 03:55 PM

[DavidtheGrim:]

Not far wrong so far!

Jul 23 04:34 PM