ETF Update: Finding Promise Throughout Sector Universe

The market rebound has dramatically changed the sector picture. A few weeks ago there were no choices. Now our entire sector universe holds promise.

We examine sectors through a disciplined, computer-tested approach using many years of data. As is the case with most successful trading systems, Trend is a key element. Bottom-calling is difficult and few have a proven record with that method. We do include a Cyclical element, where we observe the pattern of stock prices within a channel. This is a bit like the guy in the TV commercial, only a lot better. Finally, we have done a bit to accelerate our triggers, introducing an element of anticipation. Sometimes this is a mistake, but more often we find a good sector a bit sooner.

The very best results from the method come when the baton is handed from one sector to another, as new strength is identified.

Since we apply the method to the universe of ETF's that we follow, we call it the TCA-ETF method. Our universe includes 57 ETF's representing a variety of market sectors and some foreign exposure. (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

The Best of the New Entrants

Each week we try to feature a sector of special interest. Often it is not our top-rated choice, especially if we have covered that story in recent weeks. Sometimes there is a close choice. Last week we highlighted financial ETF's -- a good choice, and still dominating our ratings.

The most interesting new entrant last week was the Dow Jones U.S. Home Construction Index Fund (ITB). The top ten holdings constitute 56% of the fund, but no single position is greater than 7.5%. The P/E ratio is not meaningful, since, as we all know, these companies are all losing money. The chart below (click to enlarge) summarizes what the model sees.

The model triggered last Friday, when the sector moved into our top eight holdings. (The weekly program uses the top six, so it is knocking on the door for that method.) The real question is what it would take to get back to the days of last October, before the downfall of Lehman and the lockup in credit markets.

Other Viewpoints

The Kirk Report, one of our featured sites, noted that this sector was a big winner last week, but also cited economic challenges in the week to come. The Kirk report is a must-read for those monitoring current market action, as well as an extensive reading list of key sources.

John C. Ogg at 24/7 Wall St. took a nice look at the housing data and the market reaction. We provided our own look at housing in this article.

There was not much else in the expert guru space, but that does not trouble us. Much of the success of the sector will depend upon plans for the economy, troubled assets, restoring lending, and dealing with potential foreclosures. Progress on any of these fronts will help deal with the existing inventory of new homes, which has been dramatically reduced.

These factors are all developing, but face continuing market skepticism.

Weekly TCA-ETF Rankings

All of our sectors except the inverse ETF's are now in the "buy" range, with high ratings for financials and some other groups. It was an excellent week for the system, gaining over eight percent and beating the S&P 500 by two points.

Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll. (Ticker Sense had some technical problems and did not post the new positions last week, but we noted our vote in last week's article.)

We should also note the continued strength in RSX, which we own, and the move in energy. (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.

Comments

[Kunst:]

It looks like SA needs an advertising section.

Mar 31 01:50 AM