ETF Update: Is It Time for Inverse Index Positions?

It was a difficult week for investors, almost regardless of market sector.  As we have observed in our last several updates, a general deterioration in market sectors helps the investor get a good feel for the overall market.  Last week we wondered whether there was anyplace to "hide".  We noted that the inverse market sectors ETFs  were showing surprising strength.

Markets versus Sectors

Most ETF investors are interested in finding the best sectors.  The advantage of considering market ETFs and their inverses -- (SPY) and (SH), (DIA) and (DOG), (QQQQ) and (PSQ) -- is the ability to compare the overall market to individual sector performance.

Sector concentrations have a higher beta -- more risk and more reward.  It is unusual for a play on the overall market, long or short, to have more appeal than individual sectors.

Last week's emergence of the ETF index shorts was quite unusual, suggesting that we should both rank and invest in index ETFs along side our regular TCA-ETF universe.

This Week's Featured Sector: IEO

Our featured sector this week, still not matching (KOL) but worthy of a buy rating is the iShares ETF covering the Dow Jones Oil and Exploration Index (IEO).  The top ten holdings make up about half of the fund and the beta is about 1.5.

Tom Lydon notes that this fund will benefit from any step up in exploration.  In another article, he also writes that the actual payoff might be delayed.

It is an interesting choice, but perhaps not as exciting as we normally expect to see.  We are really poised and looking for a sector rotation.

 

 

Weekly TCF-ETF Rankings

Our weekly ratings go from Thursday to Thursday.  The performance gained from some short positions, as the table shows.  There is clearly a benefit from looking at index ETFs, as we suggested last week.

There will be a turning point, of course.  The TCA approach has a cycle factor for specific sectors, but it is not a "bottom-calling" method.

Here is the chart for the most recent trades and current ratings as of Thursday's close:

 

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETFs 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 ETFs 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 ETFs.  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.

Comments

[Roudy]

I appreciate all the good information I get from you and Seeking Alpha but I've now decided at my age of 65 years to leave all this to my mutual fund company to figure out. I still read this blog with much interest. Keep up the good work. RoudMan