ETF Update: Financial Sectors Take the Lead

The stock market rally faltered at the end of last week. Our trading system suggests that the pull back is an opportunity. News developments support this.

In particular, several important fundamental factors point to better prospects for financial stocks. The same sectors have also moved quickly to the top of our sector ratings. Let us take a closer look.

The Model

Based upon a careful process of system development, our sector model uses a combination of discovering Trends, factoring in Cycles, and a touch of Anticipation. We apply the system to a universe of 57 ETF's representing a variety of sectors and including some international candidates. The TCA-ETF method provides a useful alternative to a focus on the market averages. Sometimes the story can be seen more clearly by looking at strengths and weaknesses in specific sectors. (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Our ratings show a dramatic change from last week, with financial and brokerage sectors rocketing to the top of the chart. Financial Services (IYG), Regional Banks (IAT), Global Financials (IXG), US Financials (IYF), and US Broker Dealers (IAI) take five of the top seven spots in our rankings.

The IYG chart (click to enlarge) does not look so special, but it has some features that the model finds attractive. A rebound from the lows on high volume is good. There is also plenty of room to run before hitting resistance at the January levels.

Fundamentals

There are three important developments helping financial stocks.

First, the Congressional hearings on mark-to-market issues have prompted a quick response from FASB. Many observers are skeptical about the value of the so-called toxic assets. Whatever one believes on this score, the new rules will help. Financial institutions will be able to meet capital requirements more readily and will have a reduced risk of big write downs. This may help in raising more private capital. The question is not whether the rule change will help, but how much.

Second, the Fed actions last week -- quantitative easing, buying bonds, etc. -- are analyzed nicely at Econbrowser, one of our featured sites. The actions have been delayed, but are still important.

Third and finally, the long-awaited Treasury plan to deal with troubled assets will be announced this week. This measure is another that was needed months ago. There will be skeptics, but we expect the plan to have reasonable success.

All three of these elements are good for financial stocks. While there has been some market recognition, it is a relatively small rebound from the lows.

Weekly TCA-ETF Rankings

Most of our sectors are now in the "buy" range, with high ratings for financials. This was not a good week for the system, since the change from negative to positive happened very swiftly. While we made mid-week adjustments, we lost some ground to the market.

Based upon the model signals, our official stance is now bullish 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

[PROXIMO:]

Today's huge move in financials reflects well on your methodology.

Mar 23 04:35 PM