ETF Update: Home Construction Tops Ratings

We like to look at the market from many different perspectives using different levels of stock aggregation and various time frames. Whether one is bullish or bearish with the next year in mind, it is helpful to look at a shorter trading perspective.

We also believe that a daily look at the performance of specific stock sectors is a great assist to your overall market feel.

What We See

Since our last report there have been some dramatic changes in our rankings. Stocks related to real estate and home building have earned much higher scores. Most of the sector universe is now out of our "penalty box," a place for sectors that violate important technical criteria. Our TCA-ETF model now shows 39 of the 57 sectors in our universe as "buys." This includes all of the broad market indexes. (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

It has been a tough year for those trying to call the bottom of the market, but the model has kept us out of the worst of times. It showed a 2% gain last week against a flat market, but we are still awaiting the strong sector moves that generate the biggest gains. Perhaps this is the time.

The surprising new leader of the rankings, vaulting from 19th place last week, are the home builders.

Featuring the Home Builders

We track the home builders via the iShares Dow Jones U.S. Home Construction Index Fund (ITB). We like the diversification, with the top five holdings representing under 40% and the top ten about 65%. The group is trading at book value with a ratio of 19 times beaten-down earnings. The beta is 1.33.

The problems in the housing sector are widely known. Both investors and traders might ask what is already reflected in the stocks. The chart below shows trading over the last year. Our entry date was the close on December 5th. (The sector moved into the buy range on the day following our last report.)

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Other Opinions

Some of our fellow pundits are seeing the same signs.

Looking to the fundamentals, The Stock Market Prognosticator picked the sector at almost the same time as our model, citing changes in housing affordability and the new Treasury plan to aid mortgage rates.

Tom Lydon at ETF Trends noted that ITB, down 46% YTD, was showing strength despite negative market news.

Kevin Grewal at ETF Trends also cited Fed moves to help mortgages, suggesting that the group may have found a bottom.

The TCA-ETF model is not alone. There are some fundamental reasons behind the signal.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, December 11th. 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. There was quite a bit of turnover in the top eight positions, where the rankings are shown in magenta. The ETFs featured in our last two reports, GDX and FXI, remain near the top of the list.

Based upon the current ratings, we moved from neutral to bullish 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 do not buy a sector that is in the "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.

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.