Pharma Phobic: 5 ETF Pullback Choices

 |  Includes: FAA, GXG, NRK, SKOR-OLD, XPH
by: Marc Gerstein

Sometimes, I can easily discern themes when I look at the weekly selections from my ETF Pullback model (see Appendix below for explanation and performance data). Other times, I have to strain to do that. And then, there are weeks like this, where theme is either completely absent or discernable only through use of a higher form of intelligence unavailable to earthlings like us.

Here’s what we have this week.

  • Claymore/NYSE Arca Airline (NYSEARCA:FAA)
  • Global X InterBolsa FTSE Colombia (NYSEARCA:GXG)
  • Nuveen New York Inc Municipal (NUN)
  • IQ South Korea Small Cap (NASDAQ:SKOR-OLD)
  • SPDR S&P Pharmaceuticals (NYSEARCA:XPH)

This is last week’s group.

  • MSCI Indonesia (NYSEARCA:EIDO)
  • Market Vectors Indonesia (NYSEARCA:IDX)
  • Market Vectors Long Municipal (NYSEARCA:MLN)
  • iShares S&P US Pref Stock (NYSEARCA:PFF)
  • SPDR Nuveen Barclays Capital Muni (NYSEARCA:TFI)

What makes the current list even odder is that I’m not able to trade SKOR at, the brokerage firm I use so, you’ll note in the disclaimer below that I list myself as being long only four positions this week (I allocated to 25% each at the time of purchase).

I thought about just passing over SKOR and substituting the ETF that ranked sixth in my model, but that was another big-pharma name so I decided to pass. That, actually, raises a point that harkens back to an interesting and sometimes vigorous discussion that followed an article I posted earlier this week on Seeking Alpha discussing Garmin (NASDAQ:GRMN), which often passes my equity-oriented Warren Buffett model.

The main theme is whether such a stock could be eligible for a Buffett strategy given statements made by and attributed to Buffett in the past regarding technology and his discomfort with such businesses. I made a point to the effect that we are all different and are comfortable or uncomfortable with different kinds of businesses.

Speaking for myself, there are a lot of things in tech with which I feel fine, but big pharma is an area that scares the heck out of me. I have no idea how the majors are going to replace all the revenues they had been getting from expired and/or aging patents and how they’re going to persuade health insurers to pay for the cost of what they do come out with or how they’re going to come up with blockbusters so spectacular as make insurers fearful of resisting.

Judging from what I’ve often seen with the companies and the stocks, lots of other investors and pharma executives look to be wondering about the same things. I’m open to small pharma or biotech, where it’s easier to study up in detail on one or perhaps two new drugs any of which can have a big impact on company and share price performance even with small-scale adoption. But the big firms, and the ETFs that tend to feature them prominently are way outside my comfort zone.

For this specific technical-analysis strategy (a one-week pickup of ETFs that have potential for a bounce following a counter-trend pullback), I can handle anything, including big pharma. That’s the difference between technical analysis and fundamental analysis. With the former, I don’t have to love, or even like, what I buy. But, and this is a big “but,” even with technical analysis, I’m not going to go out of my way to take an atypically large stake in something I don’t like, as would be the case if I substituted a second pharma ETF for SKOR.

Looking at the rest of the list, I see nothing earth shaking. There’s one airline ETF. To me, that would hardly be my idea of a great long-term investment, but airlines do make for terrific trading vehicles given the volatility of the business as well as sentiment. With munis, budgets loom large as a concern but I can live with a weekly trade and even within this sector, if I have to back one particular city, I’m OK picking the one run by Michael Bloomberg. And as to GXG, I’m intrigued by Latin America in general, but don’t have a firm fundamental conviction one way or the other with Colombia in particular.

Finally, there’s SKOR, the South Korea ETF I can’t trade. I’m interested in the country and might be happy to see another ETF from there show up in the model down the road. But I can live with the need to pass this one by at this time. Trading through the FolioInvesting window system gives me as close to zero transaction cost as I can ever hope to expect and makes it possible for me to handle this model’s weekly turnover, often 100%, without even blinking my eyes. Hence I’m willing to tolerate a bit of inconvenience every now and then.

For the record, Figure 1 is a screen shot from my account showing my performance with this strategy at FolioInvesting.

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Figure 1

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It hasn’t always set the world on fire, but thus far, it has produced a bit of market-beating return with what looks to be less volatility. I like to reach higher with a lot of my equity picks, but considering my willingness to take risks there, as with my efforts in the stocks-below-$3 area, I figure my total portfolio needs a healthy dose of what this strategy has been providing.


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

  • 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, 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 2 shows the result of a StockScreen123 backtest of the strategy from 3/31/01 through 10/7/10.

Figure 2

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Figure 3 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 3

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Disclosure: Long FAA, GXG, NUN, XPH. No position in SKOR-OLD