Let's pose an important investment question: What sector has the best chance of doing well over the next decade?
My vote would be for biotech. An aging population will need more health care. The big discoveries in drugs are coming from biotech. While the exact path to profits may be tricky for an individual company, the attractiveness of the sector is manifest.
Sometimes our model makes a short-term call that aligns with the interest of the long-term investor.
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.)
Spotlight on Biotech
We trade the biotech sector via the iShares Nasdaq Biotechnology Index Fund (IBB). The holdings include over 125 companies on a modified cap-weighted basis. The top ten holdings make up about half of the fund and include the big names you know. No single holding is over ten percent. The P/E ratio is over 30, but this means little. Most biotech companies are still "story stocks." You are buying a basket of stocks with great potential, most of which do not yet have earnings. Surprisingly, the beta is only .73. This is a sector following a different drummer.
Here is a look at the daily chart (click to enlarge).
This ETF just escaped the penalty box. (You will not see it in the table below, which is based upon Thursday's close. We bought the sector on Friday.) It certainly looks like a close match for the S&P 500 over the last year. That has been the story of sector investing. Everything has been strongly correlated with the entire market. The model is at its best when we have a range-bound market, with emphasis on stock picking.
For a contrast, the long-term investors may prefer a weekly chart (click to enlarge).
As you can see, the long-term story is quite different. One of the uses of our weekly ratings is helping to time the entry for investors with a different time horizon.
Other ETF Experts
Each week I consider what other ETF experts have to say about our featured sector. There are some interesting observations this week.
Deron Wagner at TheStreet.com's Real Money site (subscription required) also notes the technical strength and provides a supporting chart.
Michael Johnston examines the fundamental factors for the sector and compares the various ETF entries. My choices are based upon frequent trading, so long-term investors should take a good look at his analysis.
Gary Gordon looks at IBB as part of a diversified portfolio. Read the entire article to see his interesting approach.
The ETF Daily News is closest to our theme, seeing a great year ahead for biotechs.
Weekly TCA-ETF Rankings
The market was down slightly last week and our frequent trading program exactly matched the S&P 500. We hold six positions, adjusted daily, and we are now about flat (three long, three short).
We are reporting our NewArc 55, a list of ETFs 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.