ETF Update: Time to Short?

by: Jeff Miller

In last week's update we noted the absence of attractive ETFs. This week the model has turned even more bearish.

This is a good opportunity to discuss some of the characteristics of our model. The immediate recommendations are for short selling -- the inverse ETFs. As you will see, this is a tricky subject.


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.)

Shorting the Market via ETFs

The TCA-ETF model now rates the inverse ETFs above nearly all other sectors. We short the S&P 500 by buying the ProShares Short S&P 500 ETF (NYSEARCA:SH). Investors who normally would not sell short the market (and are prohibited from doing so in retirement accounts) are suddenly able to "bet both ways" on stocks.

With this opportunity comes a new dimension of risk. Here are some important considerations from good sources:

Meanwhile, a look at the chart (click to enlarge) helps us see what the model is picking up:


Shorting the market has been a loser for the past year. Has the situation changed in the last few months? It is a popular idea.

Other Experts

Very few ETF experts highlight the inverse choices, even when they do not like the market. One outstanding exception is the ETF Daily News, which has an explicitly bearish outlook.

We could also cite many pundits who are bearish on the market, but readers can find these sources quite easily on their own. Nearly everyone has advised caution and highlighted concerns over the past few months. Most of these sources are also not very specific about changes of opinion. We are poised to switch if the data change.

Weekly TCA-ETF Rankings

The S&P 500 gained about 3%. Our frequent trading program has been bearish, but still gained 0.7%. The system is not geared to catching market turning points. It has a great long-term record on moves that last more than a few weeks. We do not yet know how the current market scenario will play out.

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.


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.