ETF Update: Caution Is the Right Move

by: Jeff Miller

Sometimes caution is the right move. That has been our trading posture for several weeks, as we noted here. In the last few days our TCA-ETF system recommended a short position in the Q's, which we trade via PSQ. This is working out quite well.

Officially we are following Felix, the more conservative of our models. As you will see, the more ebullient Oscar is ready to buy energy stocks and emerging markets.

(I have lapsed a bit on the planned weekly schedule for Oscar and Felix. This is partly due to taking a little time off and partly because there have been no new trades. I am planning some more vacation time this summer. Interested readers can always get email updates. Just write to etf at newarc dot com to get on the free list, which provides ratings with a slight delay).


Traders all seek rewards but they have differing appetites for risk. It is important to find a method that suits your personality and needs. Our short-term trading systems are basically Trend-following, but also include recognition of Cycles and a touch of Anticipation. Since we apply the method to ETFs, we call it the TCA-ETF system. We follow two versions of this method, designed for two clients (Oscar and Felix) with different needs and risk appetite. [New readers can find more information about the models at the end of this article.] For convenience, we have named the models based upon the intended clients.

Selling Short the NASDAQ 100

When indicated, we take a short position in the QQQQ's by going long the inverse ETF (NYSEARCA:PSQ). Felix adopted this position several days ago. Here is the chart (click to enlarge):

Psq June 2010

This is the only position in the buy range for Felix. Oscar is more aggressive at finding new longs. You can see the list of Oscar suggestions in the table below.

Other Expert Opinions

Only two of our fellow ETF experts had anything to say about this idea.

The Wishing Wealth blog agrees with Felix about heading to the sidelines. There is also a nice chart of the QQQQ's with a different interpretation. Check it out.

When trading the QQQQ's you need to know the index composition because of infrequent rebalancing. I suspect that few readers knew that Apple Computers, Inc. (NASDAQ:AAPL) makes up 20% of the index while Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG) account for less than five percent each. Check out the Bespoke Investment Group site for a full table of weights.

The "Think BIG" team also has an article on the NASDAQ breaking the 200-day moving average. You can get valuable free information from this site every day, but you should also consider the premium service -- well worth the price for active traders.

This Week's Results

Felix, the cautious approach, has continued on the sideline with a slight negative lean. Nearly everything is in the penalty box. Felix sees the world as too unpredictable right now.

Oscar, the more aggressive approach, is always looking for a way to win. Oscar is unafraid of the volatility and now has many suggestions for fresh buys -- mostly energy and emerging markets.

Weekly TCA-ETF Rankings

We are currently slightly short in our Felix ETF program and finding new buys for those following Oscar. (We are happy to report and discuss performance with interested investors. We also offer a report on how we use the models, and a free weekly email update. Write to etf at newarc dot com. Our actual trading is a combination of both models and some weekly timing).

As recently noted, I am changing the timing schedule for this weekly article. It will now appear mid-week, with a one-day delay in the ratings. The ratings below are from Wednesday's close.

Please note that these are not recommendations. Investor needs and risk tolerance varies. We hope everyone finds the ratings to be a useful supplement to their own work. The recommendations can change quite rapidly in this environment. It is quite possible for investors with different time frames to reach opposite conclusions about a specific trade.

Here are the current rankings for both Oscar and Felix (click on each to enlarge).

Felix shortened 062410

Oscar shortened 062410

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation. We also have free reports, available upon request to etf at newarc dot com. These reports describe how we use the system, compare results from Oscar and Felix, and contrast the method with our long-term trading approach.

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.

Oscar and Felix. We follow two versions of this method, designed for two clients with different needs.

  • Oscar believes in the long-term strength of the economy and the stock market. He has a lovable and irrepressible enthusiasm. When things go wrong, he steps back for a bit, but soon tries again. He expects to do better than others during good times. Oscar understands that this approach involves more risk. Oscar is opportunistic.
  • Felix also has a positive long-term outlook, but he is something of a fussbudget. He is much more cautious, with an emphasis on capital preservation. He is perfectly willing to step aside from the market when there are signs of danger. He knows that he will miss some moves, but that is OK. He scores big gains when the market moves lower and he escapes the loss.

There is more detail on Oscar and Felix in this article. There is more about the Penalty Box here.