Sometimes a picture does it best. If you can identify the actor in the scene below, you'll have a simple summary of current market opportunities.
The last time we had so few sectors in the "buy" range was in March of 2009. There are still a couple of good choices, including the big banks, our featured sector for this week.
Meanwhile, the picture shows one of my favorite actors in his most memorable role, Major "King" Kong, the bomber pilot in the 1964 classic, Dr. Strangelove.
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.)
Profits from the Big Banks?
We trade major banks via the SPDR KBW Bank ETF (NYSEARCA:KBE). The holdings include twenty-six names using a modified cap-weighted basis. It includes all of the big bank names you would expect, starting with Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC), and Citigroup (NYSE:C). The fund has a P/E of about 16 and an earnings growth rate of 8%, but this is the wrong approach for bank stocks. Investors are interested in book value, balance sheets, and the quality of assets. Dividends are only 1%. The TCA-ETF model, of course is driven by technical information. Here is the chart: (Click to enlarge)
The recent weakness came in the wake of President Obama's plan for increased bank regulation. Critics like Meredith Whitney view this as an attack on the fundamental business model. Meanwhile, Congressional leaders like Barney Frank are in no rush to implement these changes.
Perhaps the biggest bullish argument for banks is the yield curve slope, allowing them to make profits on the rate spread.
There has been little recent commentary on the banks. In early February, Michael Johnston noted that KBE was the surprise ETF leader, on a YTD basis. (Homebuilders, another surprise group, have now grabbed the lead.)
When the pickings are slim, it is a time for caution.
Weekly TCA-ETF Rankings
The S&P 500 gained almost 1%, but it felt worse because of the volatility. Our frequent trading program gained 0.1%.
We are reporting our NewArc 55, a list of ETF's that has little overlap and low trading costs. We continue to rate all sectors, a report that is available upon request. Here is the weekly report, based upon last Thursday's close.
Click to enlarge:
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.
Disclosure: [We are long GS as well as KBE]