ETF Update: Sector Leadership Still Not Clear

Last week's big story was the market rebound, a "V" action that has sparked debate over whether the rally can be sustained.

We like to consider sector action over our universe of 57 ETF's as well as looking at the overall market. A strong market generally has a lot of breadth and also some good leadership. Our method uses a combination of Trending and Cyclical factors to determine the most promising ETF buys for the next 30 days. (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

The Current Market Debate

While some observers spotted the signs predicting last week's rally, most of the pundits remain skeptical. David Fry at ETF Digest, invoking Santa and the tooth fairy, goes so far as to suggest that the powers that be are pumping up the market.

Nouriel Roubini remains very bearish on the economy and the market, warning that this is a "sucker's rally" before the rush to the financial Titanic's lifeboats. The analysis at Calculated Risk emphasizes that the only economic improvement has been a slowing in the rate of decline.

Briefly put, most analysts need to see more than a sharp rally from oversold conditions before they are willing to climb aboard. Based upon long experience, our model takes a similar approach.

Weekly TCA-ETF Rankings

All three of the three inverse ETF's are in the buy zone, and all other sectors remain in the penalty box. Our weekly program lost back our gains from the prior week, almost as if we had been out of the market altogether for the past three weeks.

We do not share the intense skepticism about current public policy initiatives, and will not therefore be surprised to seem some improvement in conditions. As we said last week, we expect some losses at turning points, especially when the move is a sharp one. Our official market posture remains bearish in the Ticker Sense Blogger Sentiment poll. There are only three of 57 sectors in the "buy" range, and they are all inverse ETF's.

We expect some sectors to move into the buy range this week, leading to some mid-week adjustments (click on chart 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.