'Delta Factor' Projections For Sector ETFs

by: Lowell Herr

While I do not build portfolios around sectors of the stock market, it is important to review sectors ETFs as it provides another view of market conditions. We examine the Bullish Percent Index information as shown in this article, to see where the market as been and is it over-bought or under-sold. When the BPI values are above the 70% line, as most are today, we argue the market is too high to be an aggressive buyer. When the BPI values are below the 30% line, it is time to back up the "securities truck" and load up the portfolio with equities. This does not happen too often, but it certainly was the case in late winter of 2009.

The "Delta Factor" information is quite different from Bullish Percent Index information in that it attempts to peer into the future. We are looking for the slight probability advantage that will put us on the right side of future major market movements.

In the following table we see the best opportunity for future gains is the financial sector, VFH. The others are either a Hold or Sell. I would be particularly cautious of any sectors that are flashing a Sell signal. Note that healthcare, VHT, is a Sell. This is a different message than what the momentum and optimizer software is telling us what to do. Which path to take is a good question to ponder? Take a look at these technical indicators for VHT. You will see, when this was written, that VHT is bouncing above the 70% RSI line and that is a warning this ETF is over bought. Once more, it is time to be cautious and patient.

Click to enlarge

Click to enlarge