ETF Update: Transports Challenge the (Double?) Top

Some market analysts are "bottoms-up." They pick stocks whatever the market. Others are "top-down", starting with broad macro themes. Both approaches can lead to winning results, but there is another helpful perspective: Market Sectors.

The changing behavior of market sectors helps to reveal broad themes and opportunities. Our system for doing this reflects the Trend, considers the Cycle, and adds a bit of Anticipation. Since we look at a universe of ETFs, we call it the TCA-ETF model. (The complete current rankings are at the end of this article, along with an explanation of our methodology).

Weekly Market Overview

The sector approach is especially good for getting perspective at the start of a new week. This week there are three interesting themes.

First, the weak dollar plays now show a mixed picture. Energy has gotten weaker, and gold dropped rapidly in the rankings.

Second, there is more strength and diversity at the top. There is greater strength in technology and in all of the broad market ETFs.

Third, the big ratings move for the week came from transportation, this week's featured sector.

Spotlight on the Transports

We track and trade the transportation sector via the iShares Dow Jones Transportation Average Index Fund (IYT). It is pretty concentrated with 43% of the fund in the top five stocks and over 2/3 in the top ten. The P/E is about 17 and the beta about 1.2. Those numbers are pretty high if you think the economy is going much lower, or pretty low if you think we are near the bottom of the economic cycle.

The fund emphasizes railroads, package delivery, and trucking. Airlines are included, but make up only 4% of the holdings.

Let us start by looking at the chart, since some of the pundits have a technical opinion. For those of us from the Art Cashin school of "cocktail napkin" technical analysis, it appears that the group is doing a good job of fighting resistance at the 60 level. The initial risk looks like 53 or so. The initial reward is more difficult to determine.

Expert Commentary

Each week we search the top sources on ETF commentary to see if anyone else is highlighting our featured sector. We also augment this by looking for information on the underlying themes and specific stocks.

This week, the results are pretty thin, suggesting that few are interested in this group. Let us look more closely.

The prolific David Fry mentions IYT in his Friday outlook. He sees a mixed picture, but you should look at his typically nice chart and specific commentary.

The Trading Goddess wants to see a breakout before buying.

From the macro perspective, Barry Ritholtz reminds us that truck tonnage is down. He sees no "green shoots" in the transports.

The biggest negative comes from technical analysts like Bonddad who see a double top.

Our Take

As contrarian investors, we always find it interesting when our trend-following method finds a sector that other pundits do not seem to like.

We also note that many analysts are too quick to conclude that rising fuel costs are bad for the entire group. Many trucking companies can pass on fuel price increases. The package companies do so with a delay. The railroads are advertising fuel efficiency. The airlines make up only a small portion of the group.

It is possible that the easy conventional wisdom about fuel and transports has concealed an interesting opportunity.

We are in the sector, but regular readers know that this can change quickly.

Weekly TCA-ETF Rankings

With 44 of our 57 sectors are in the "buy" range, we have a strong overall picture. We also have positive ratings for all of the broad market ETF'S.

We were up slightly on the week, with no major change versus the S&P 500. We like the additional diversity in our current position.

Based upon the model signals, we continued our bullish position 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.