ETF Update: Go Short

Jul.13.09 | About: ProShares Short (SH)

With a wide universe of sectors from which to choose, we can usually find something to like. Not so this week. We work hard to find emerging sector Trends, Cyclical moves, and we even use a bit of Anticipation. Despite this, our TCA-ETF model finds few appealing choices this week. (The complete current rankings are at the end of the article, along with an explanation of our methodology).

The Market Debate

The bull/bear debate is a nearly constant market feature, but few find it helpful. Usually we have some featured sectors to examine, but this week it is all about the market. Here is the current take. Let's start with a look at the short side, the chart of the inverse S&P 500 from ProShares (NYSEARCA:SH).

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We can see what the model likes -- a rebound from the lows and significant upside.

Technical Takes

This is a fluid situation where many moving averages are converging. At dshort.com they call it a four-way collision (Thanks to Abnormal Returns).

Over at The Technical Take (another hat tip to Abnormal returns, on top of the technical indicators) they think that the dumb money has been slow to enter. Since we have been neutral and then bearish for many weeks, after catching a good ride, we understand this perspective.

Fundamental Analysis

The market had a nice rally from the March lows. The key question: Was this a sound reaction indicating that the worst fears were not forthcoming? Or was it an indication of false hope, soon to be dis-proven?

Bullish. We expect economic stimulus to hit in the next quarter, helping earnings. The ECRI leading indicators provide some hope.

Bearish. None of this has really helped corporate profits. Companies that are beating their numbers are doing so via reduced costs. Few can be expected to make bold forecasts. We do not expect much from this earnings season. Most companies do not have independent economic forecasting. They read the same information that we all see. The economic data remains bearish.

The Result. It is a matter of psychology. Our model will not try to call the bottom, but will react as fund managers seek out the likely winners from a rebound. It is a time for discipline -- sticking to the system.

Weekly TCA-ETF Rankings

Our performance for last week was down about 0.5%, helped by our short positions (via inverse index ETFs) but losing on long health sector ETF's. This beat the S&P 500 by about 1.5% percent, a nice weekly gain..

Based upon the narrow leadership and ratings on the inverse ETF's, we have continued our official bearish position in the the Ticker Sense Blogger Sentiment poll.

Here is the table for the most recent trades and current ratings as of Thursday's close:

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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.