After last week, traders may wonder if there is a glimmer of hope anywhere. The market correction expected by many pundits for months finally had a serious impact. Sentiment and expectations have shifted despite a solid earnings season. The market debate continues to focus on the economy, with each data point the subject of both careful analysis and also plenty of spin.
While we participate in the analysis of economic data, we also have a reality check. Our model-driven approach is based upon market data.
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 to weaken. The key elements are as follows:
- We now find 99% of our ETF's in positive territory (89% last week), but that is a bit deceptive. The median strength rating for the overall list is only 8 (down from 21 last week). A score of "0" implies the average long-term ETF expectancy.
- 91% (up slightly from 89%) 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. See our article here for a further explanation of this method.
- 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 is 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 Technology Growth Stocks
There are few bright spots among market sectors, but we see some opportunity in the Vanguard Information Technology ETF (NYSEARCA:VGT). The fund seems pretty expensive with a P/E ratio of 40 and earnings growth of 20%. This PEG ratio of 2 is not attractive to long-term growth investors. 56% of the fund is in the top ten holdings, including names we know. Here are the top five: Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL), IBM, Cisco (NASDAQ:CSCO), and Google (NASDAQ:GOOG).
So why is the fund attracting interest?
One factor is that some of the biggest holdings (Microsoft and Apple) are companies with strong balance sheets and plenty of cash. In these circumstances, the trailing P/E ratio may not tell the entire story. While there is controversy about valuation, many are looking for the best ways to play a rebound.
ETF Database highlighted the sector at mid-month with the following comment:
As with most Vanguard Funds, this Technology ETF does a great job at keeping expenses down; its expense ratio comes in at 0.25%, making it the lowest in the category. The fund also has one of the highest percentage weightings to Google and IBM (a combined 13.2%). This ETF also offers deep exposure to the tech sector, with more than 400 individual holdings.
Early in the month Tom Lydon noted interest in this ETF, something that continued during earnings season.
Gary Gordon also had his finger on a key market concern. Were earnings driven merely by cost cutting, or were some companies achieving revenue increases? He mentioned VGT as an ETF to watch in his article, Stock ETF's Most Likely to Win the Revenue Race.
Here is the chart (click to enlarge):
The ETF appears to be at a key point. It is quite possible that a decline could trigger a "penalty box" sale. Meanwhile, there also seems to be rebound potential and we added the position for some accounts on Friday.
Weekly TCA-ETF Rankings
We lost over 4.5% last week, slightly worse than the S&P 500. We do not currently hold a full position, since few ETF's outside the penalty box have strong ratings. We do not buy ETF's in the penalty box or those with poor liquidity. With the market decline, the penalty box was active, so we had more frequent trading. This may also be true when we get a rebound and sectors come out of the penalty box.
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 continued our neutral position 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.
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.
Full Disclosure: We are long VGT, MSFT, and AAPL in various accounts.