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The early trading and earnings reports in 2011 have highlighted sector strength in technology. Our short-term ETF models, Oscar and Felix, have helped to identify this trend. We have a special emphasis on networking, but also hold QQQQ and VGT.

Networking stocks enjoy a top rating from our 12-month ETF model, as well as from the short-term trading systems.

There are also some good fundamental reasons to consider networking stocks, but let us first consider some basic information about our approach.

Background

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 hypothetical 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.

Featuring Networking Stocks

This week's featured sector is networking, but the ratings also show an overall trend toward technology sectors. While my focus in this update is networking, you may wish to compare your own current choices with the other top-rated technology sectors in our list.

We trade networking stocks via PowerShares Dynamic Networking Portfolio (PXQ). The fund includes a widely diversified portfolio of networking, software, and Internet stocks, including VMware, Juniper Networks, QUALCOMM, F5 Networks, Symantec, and others. The top ten holdings each have a concentration of about 4-5%. The P/E ratio is over 30, the price to cash flow is about 13, and the price-to-book is over 3, as one might expect for a growth sector. As one might also expect, there is no meaningful dividend.

Our ETF universe was selected to reflect diversity, liquidity, and low trading expenses. We carefully identified one sector of each type to be part of our universe of 55 ETFs. We now also review developments in a wider group (available to subscribers on request) to consider new entrants. A few months ago we noted the significance of networking, and added it to our featured list.

You can see the reason for our interest from this chart (click to enlarge):

Pxq January 2011

The group has been strong for several months, and the trend is continuing.

Other Opinions

We always survey commentary from other experts on the ETFs in our buy zone. There has not been much commentary, other than to note the overall strength in the group.

We never mind it when few have joined us in recommending a sector. The members of this group are part of a technology upgrade cycle including chips, software, and security protection.

This Week's Results

Felix, the more cautious approach, has fully participated in the market rally. The sector ratings have reflected the strength, with many good choices to buy. We hold the top five positions, so technology has been a recent emphasis.

Weekly TCA-ETF Rankings

The average rating is weaker, but we remain fully invested in our Felix ETF program and also for those following Oscar. This flows from the positive market ratings that we report in our (almost) weekly update on the market. (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).

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 to enlarge).

Felix 01-12-11

Oscar 01-12-11

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.

Source: ETF Update: Tech Stocks Take the Lead