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In a wild and volatile week for equity markets, there was really no place to hide. Anyone who owned stocks experienced significant losses. Is it time to bail out, or are there still attractive opportunities in ETF's?

Our analysis shows a genuine opportunity in Japan, not just a "safer place" to park money.

Background

Each week we provide a list of sectors emphasizing those that we expect to have the best performance over the next three weeks. 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. While our ratings share characteristics with momentum and relative strength approaches, there are important differences. 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 provides a nice feel for the overall potential of the market. It is not the forest nor the individual trees, but something in between.

I have been using this as part of the basis for "macro commentary" on the market. Beginning this week, I am doing a separate look ahead with our model output as part of the message. Regular readers can look here for that content. I will no longer do a macro look in this weekly ETF post.

Looking to Japan

We trade the Japanese market via the iShares MSCI Japan Index Fund (NYSEARCA:EWJ). The fund is loaded with names you would know -- Toyota (NYSE:TM), Mitsubishi (OTCPK:MMTOF), Honda (NYSE:HMC), Canon (NYSE:CAJ), Sony (NYSE:SNE), Panasonic (PC), and others. The top ten constitute only 22% of the fund, so it is a broad play on Japan. The list of total holdings is over 300! The ETF does not look cheap on standard criteria. The P/E ratio is almost 30 and the price-to-book is about 1.5. The beta (versus the S&P 500) is .85, reflecting the somewhat reduced risk.

With these fundamentals in mind, here is a look at the daily chart (click to enlarge):

Ewj daily

You can see that the sector has been uninteresting until the start of the year. The trading picture can seem dramatically different when viewed in different time frames. Since our model has a three-week time horizon, it is interesting to use a weekly view

(click to enlarge).

Ewj weekly

This chart does a nicer job of showing key points, including the following:

  • The relatively low level, from a long historical perspective - especially our key area of last autumn.
  • The relative performance in recent months when compared to the S&P 500.

Other ETF Experts

Each week I consider whether other ETF experts have also highlighted a sector of interest.

Gary Gordon, one of our favorite sources, has a very nice take on Japan. In this recent article, he notes the potential attractiveness of "unloved" sectors. In another piece (only a week ago) he examines five things you did not know about Japan. He looks at risk, volume momentum, and other considerations. You really need to read the entire article.

Bespoke Investment Group cites the relative performance of Japan, using both yearly and recent indicators. Check out the entire article to see their excellent graphics (which we have all come to expect!)

Japan funds see an investment inflow.

To summarize, there is reason for interest.

Weekly TCA-ETF Rankings

It was a brutal week for anyone who was long. We lost about 5.6%, significantly worse than the S&P 500 loss of 3.9%.

This week marks two changes in our regular reporting. We are separating our overall market commentary for the week, drawing upon the model and reported here, and we are reducing our list of ETF's.

The NewArc 55.

With this article we are introducing a list of ETF's that has several attractive features for us and our audience.

Here is a brief summary of the new list and our reasons for the choices:

  • The list reflects a wide range of sectors with little overlap.
  • When choosing a specific ETF to represent a sector, we have emphasized the consideration of frequent trading. We seek high liquidity and narrow bid/ask spreads. Other choices may make more sense for investors with different time frames.
  • We avoid having several sectors with similar properties. We have studied the correlations among ETF's and looked for a pure list.
  • We seek maximum information for readers. If you ETF is not on the list, you can find one that is a close substitute. If you wish, you can sign up for our regular weekly update with the full list.

While we are happy with the list for our trading purposes, we are open to nominations for the trading list or for the expanded list.

Here are the top sectors from our new universe of ETF's. The list also includes the values for the broad market ETF's and their inverses (based upon Thursday's close). The record reflects clients who participate in our daily trading program. Those following weekly adjustments have slightly different results.

12210

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: Investing in Japan; Plus, Introducing the NewArc 55