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With the market treading water, it is ever more difficult to find a promising sector. Each week we use our sector model to find the best ETF's and give us some insight into the overall market. Our macro look as become more negative, but there are still a few bright spots.

Our Approach

We stick to the system, studying sectors continually, looking at the charts and ratings for hundreds of ETF's. Each week we provide a list of our top-rated sectors for the next three weeks, along with some of our current observations. ETF investors can check out the list and compare our findings with their own conclusions.

In our analysis, 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. We also have a free report with more detail on the system and results, available on request.)

The Macro View

From an overall market viewpoint, our indicators continue in positive territory, although it is a close call. The key elements are as follows:

  • We now find 89% of our ETF's in positive territory (94% last week). The median strength rating for the overall list is 21 (down from 25 last week). A score of "0" implies the average long-term ETF expectancy.
  • 89% (up from 75%) of our sectors are in the "penalty box." This means that they are currently disqualified from the buy list for technical reasons. You can think of this as a sophisticated "stop loss" rule, often applied in advance.
  • Our index package is neutral. For this rating we look at the ETF's (both long and short) for the S&P 500, the Dow, and the Nasdaq. You can see these ratings in the results table for this week. While the index ETF's have positive ratings, both the longs and the shorts are in the penalty box.

Spotlight on the Internet

We trade the Internet stocks via the PowerShares NASDAQ Intenet Portfolio (NASDAQ:PNQI). The Internet group includes top holdings in the names everyone knows, with the top five constituting 45% of the fund. As we might expect, the dividend yield is zilch, the P/E ratio is a touch over 30, and the price-to-book is over 3. This is a growth story. Here is the chart (click to enlarge).

Pnqi

It is easy to see from the chart why the model has picked up this sector.

Eric Dutram at ETF Database highlights the fundamental support for the sector, citing strong earnings from Microsoft and Amazon.

Most of our regular ETF sources have little to say about the Internet.

Weekly TCA-ETF Rankings

We had a small loss last week, a bit better than the S&P 500. Our current holdings are still not near the top in strength rank, but they still have good ratings. Our testing has shown what Vince calls "robust" results for anything with a positive strength rating. We do not buy ETF's in the penalty box or those with poor liquidity. We provide these ratings as information for readers who may not trade as frequently as we do. Those signing up for our free weekly email update can also get the entire list.

As noted above, the macro market indicators are in the penalty box, and most other ETF's are in the penalty box. Based upon the current model signals, we have shifted our marginally bullish position to neutral in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 280 ETF's. The list also includes the values for the broad market ETF's and their inverses (click to enlarge).

102209

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.

Source: ETF Update: Spotlight on the Internet