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This the second consecutive week in which the ETF Pullback model (see Appendix below for explanation and performance data) has an international flair, but this time around, the flavor is considerably different.

Here is the current collection of ETFs:

  • iShares MSCI Hong Kong (NYSEARCA:EWH)
  • iShares MSCI South Africa (NYSEARCA:EZA)
  • Global X InterBolsa FTSE Colombia (NYSEARCA:GXG)
  • SPDR S&P International Mid Cap (NYSEARCA:MDD)
  • iShares MSCI Turkey (NYSEARCA:TUR)

This is last week’s group:

  • WisdomTree India Earnings Fund (NYSEARCA:EPI)
  • iShares S&P India Nifty 50 (NASDAQ:INDY)
  • Market Vectors Latin Amer. Small Cap (NYSEARCA:LATM)
  • PowerShares Fin. Preferred (NYSEARCA:PGF)
  • Global X Silver Miners (NYSEARCA:SIL)

The turnover is to be expected. As noted on several occasions in the past, this is a purely technical model that gets rebalanced once per week. But frankly, I do miss last week’s themes, India and Latin America. Those are markets I’ve watched and been considering for longer-term investing.

This week’s grouping seems more like a hodge-podge. The selections are not necessarily less attractive. Indeed, South Africa is particularly intriguing given the potential returns that could be achieved in Africa if that continent can finally get itself moving, economically speaking. Frankly, though, that’s still a tough call to make, and I had actually been looking more toward Nigeria than South Africa. Meanwhile, the Colombia ETF preserves Latin American exposure and we have a China -- Hong Kong, actually – play. I’m sure the increasing Europeanization of Turkey will be interesting, but at this point, I couldn’t even begin to guess if that will ultimately be bullish or bearish for stocks there, although conventional wisdom for now suggests the former. Finally, we have MDD, the international catch-all, although my eyes widen a bit at the mid-cap focus (when it comes to stocks, for me, the smaller the better).

All that is well and good, but I think the ultimate message of the model is the quantitative equivalent of a “what the heck” shrug of the shoulders. That is something I easily grasp. I’m finding it very hard to develop any sort of conviction about the U.S. markets right now. I can see lots of reasons why U.S. stocks should correct, or at least pause. Some days, it looks like it will happen. Other days, we go back to reaching for the stars.

This week’s ETF collection looks to be as good a response as any: Close our eyes and just play the technicals.

APPENDIX

To create this model, I started with a very broad-based ETF screen I created in StockScreen123.com.

  • Eliminate ETFs for which volume averaged less than 10,000 shares over the past five trading days
  • Eliminate HOLDRs (I don't want to be bothered with the need to trade in multiples of 100 shares)
  • Eliminate leveraged and short ETFs (I think of these as hedging tools rather than standard ETF investments of even trading vehicles)

Then I sorted the results and select the top 5 ETFs based on the StockScreen123 ETF Rotation - Basic ranking system, which is based on the following factors:

  • 120-day share price percent change - higher is better (15%)
  • 1-Year Sharpe Ratio - higher is better (15%)
  • 5-day share price percent change - lower is better (70%)

The idea of using weakness as a bullish indicator is certainly not new. But often, it's an add-on to other factors that, on the whole, emphasize strength. Here, the weakness factor is dominant, with a 70 percent weighting.

This model is designed to be re-run every week with the list being refreshed accordingly. I trade through FolioInvesting.com, where I pay a flat annual fee rather than a per-trade commission, so I don't care about the fact that turnover form week to week is often 80%-100%. If you want to follow an approach like this but do have to worry about commissions, the strategy tests reasonably well with three ETFs, or even with one. (Cutting the number of ETFs is far preferable to extending the holding period.)

Figure 1 shows the result of a StockScreen123 backtest of the strategy from 3/31/01 through 10/7/10.

Figure 1 [click to enlarge images]


Figure 2 covers the past five years, a very challenging market environment that witnessed the fizzling of many strategies that had succeeded for a long time.

Figure 2



Disclosure: Long EWH, EZA, GXG, MDD, TUR

Source: Around the World: ETF Pullback Choices