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President Obama's China visit will be a news focus for the next few days. Investors will follow developments closely for hints about trade, the dollar, implications for the U.S. economy, as well as several important challenges to international cooperation. Because China is the biggest lender to the US, the relationship is changing.

This occasion is also a good time to consider the prospects for direct Chinese investments. We identify such opportunities through our sector rotation model.

In our disciplined system, we study 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 model also provides a nice feel for the overall potential of the market. I'll take a look at the macro picture first, and then take a look at our featured sector of the week.

The Macro View

From an overall market viewpoint, our indicators remained weak. The key elements are as follows:

  • 31% of our ETF's in positive territory (up from 23% last week). The median strength rating for the overall list is a negative 6 (up slightly from -9 last week). A score of "0" implies the average long-term ETF expectancy.
  • 93% (down from 98%) 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.

Spotlighting China

This week we see a number of China plays near the top of our list. While the Thursday closing ratings listed below show the various China sectors in our penalty box (described in some detail last week), some of the ETF's emerged from the penalty box on Friday. In an effort to be both topical and timely, I am going to highlight one of the ETF's we bought, the FTSE China (HK Listed) Index Fund (NASDAQ:FCHI).

As the fund name indicates, it tracks the FTSE China Index, emphasizing Chinese companies available for international investment. The holdings are pretty concentrated with the top ten names constituting over 62% of the fund. The P/E ratio is about 23, and price-to-book over 3. The beta is only 0.78.

Here is the chart (click to enlarge).

Fchi

The model may be reacting to the pattern of higher highs, and higher lows.

Expert Commentary

Gary Gordon reviews several China plays and wisely calls attention to the varying levels of concentration in financial stocks. FCHI has about 45% exposure. While Gary does not object to Chinese financial stocks per se, he warns about excessive concentration in any sector.

Michael Johnston at the ETF Database reviews a number of attractive choices for US investors. He notes that Burton Malkiel has maintained that US investors are underexposed to China.

Tom Lydon emphasizes the fundamentals of the Chinese economic rebound.

Weekly TCA-ETF Rankings

We were mostly out of the market this week. Since the S&P gained about 2.5%, we lost ground against our benchmark.

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, despite the slight negative edge in the ratings.

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.

111209

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: China on the Rebound?