ETF Update: Time for Caution

We look carefully at market sectors. Our analysis helps us in three ways.

1. In our "long only" accounts, we use the sector ratings to help in timing entries and exits.
2. In our short-term accounts, we trade the signal, finding new positions on a daily or weekly basis, depending on the established time frame.
3. In determining our overall market viewpoint, we consider various sector strength indicators to help in our assessment.

Briefly put, looking at market sectors is neither the forest nor the trees, but a useful perspective in between. We consider Trends, Cycles, and a bit of Anticipation. Since we apply the model to nearly 300 ETF's, we call it the TCA-ETF system. (For new readers, there is a more complete description of our methods at the end of the article.)

The Macro View

From an overall market viewpoint, the indicators have all declined since last week. We look at how many sectors have positive strength, the average strength, how few are in our "penalty box" (violating technical indicators), and the relative strength of the index ETF's.

All of these factors declined dramatically last week, leading us to a neutral stance on the market. We are working on methods for a better quantification for market timing. We hope that others find these indicators useful, even if not trading our specific holdings.

The Micro View

The ratings also generate a leading sector. This week the focus is on Austria, which we trade via MSCI Austria Investable Market Index Fund (EWO). The rating is consistent with other European stocks and sectors. Here is a look at the chart (click to enlarge).

It is not a very dramatic chart, but there is a nice uptrend with no apparent resistance.

There is not much comment from the pundits. Our friends at one of our featured sites, Bespoke Investment Group mention this sector as a possible "overbought" candidate.

Maybe so. And the rest of Europe (according to our readings) is in the same category. The team from BIG is providing descriptive information, not a prediction. Good data. We'll soon see if Europe (a weak dollar play?) shows more strength.

For now -- we are playing Europe, while shifting specific country holdings.

Weekly TCA-ETF Rankings

82% (versus 57% last week) of all sectors are now in the penalty box, having violated certain technical criteria. Our index package (near the bottom of the table) shows that the longs and shorts are close to even.

It was not a good week for our methods, mostly because of the strong dollar. The market was down over 1% and we were two percent worse. It goes with the territory -- part of adopting a non-correlated strategy.

Based upon the current model signals, we have shifted to a neutral position in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 277 ETF's (click to enlarge). The list also includes the values for the broad market ETF's and their inverses. Our holdings as of Thursday night were smaller than usual in front of Friday's employment number.

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

[Jeff Diercks:]

EWO looks like it is running into some short-term daily resistance at this $20.50-$21 area. It set a new high in this area on nice volume in late August and is now hitting it again (and stalling) on lower volume. To me this looks like it could be forming a double top and getting ready to head lower.

Its price relative to the EAFE index is also signaling a divergence and a possible correction.

Sep 08 05:22 PM

[hksche2000:]

With (nearly) all west european etf's represented on you list, how come EWG is missing? Poor outlook, unsat past performance or both?

Sep 08 10:58 PM

[Jeff Miller:]

EWG (Germany) is a bit lower, 75th at the time of this list, and in the "penalty box." You correctly note the regional correlation. For trading accounts, it is important to identify the most attractive choices at a given time.

For long-term investors, small rating differences are not that important. We try to provide useful news information, but the entire list of 277 is too long for this format.

Thanks for the good question.

Jeff


On Sep 08 10:58 PM hksche2000 wrote:

> With (nearly) all west european etf's represented on you list, how
> come EWG is missing? Poor outlook, unsat past performance or both?

Sep 09 10:34 AM