ETF Update:Bailout Implications

Looking at the universe of sectors normally provides a good picture of the overall stock market.  Sometimes there is an event so important that nearly every sector moves with the market.  This is unusual.  More often there is always a bull (or bear) market somewhere.  A sector focus helps in finding it.

The Washington debate over the so-called "bailout plan" has captured the attention of markets worldwide.  The focus is on what this will do for the highly stressed credit markets.

A Binary Event

This has become what we call a binary event.  It is more like what we see when a biotech company is facing an FDA approval.  This time it affects the entire market.

Some observers think that a satisfactory resolution could mean a rally of 1000 points in the DJIA.  Other observers say that a failure could mean a decline of 2000 points.

Rarely do we see a widely-followed issue that has such significance.

Implications for ETF Investors

Our last update had us playing defense, with a few featured sectors and plenty of hedging via the inverse ETF's-- PSQ, SH, and DOG.

Our approach does not rely on momentum alone.  We include a cyclical component and some other methods for anticipation -- looking a bit ahead.  (For new readers, there is a more complete description of our methods at the end of the article.)  Sometimes we try to do more.

Using a Model for a Deeper Look Ahead

On such occasions we do some model simulations.  We project the values for the market, assuming a sharp, short-term rally.  The question is whether the model will change ratings to a "buy" on key market ETF's.

Our simulation shows that it will require more than an immediate sharp rally to change away from the defensive posture.  One way of interpreting this is that there is enough overall skepticism to warrant a continued defensive posture, even if events turn more positive.

As we write this, the overnight futures contracts are trading slightly lower, still not reflecting confidence in the passage of the legislation, or its effect on credit markets.

We might choose to alter our actual positions if we see credible evidence for the plan.  Why?  It is important for traders to understand the model.  Overriding the recommendations should be done sparingly.  Only when one has great confidence that something is happening, something beyond the "experience" of the model, should one intervene.  A good way to think about this is that one has a wise committee of advisers who know much about the market.

Weekly TCA-ETF Rankings

Our only recent trade was yet another defensive move, buying GDX.  The bullish sectors reflect those most likely to benefit from the passage of a bailout program.

The system adopted a defensive posture two weeks ago, guiding us to a bearish stance in the weekly Ticker Sense blogger sentiment poll. Prices and ratings reflect Thursday's close.

(click to enlarge)

Note for New Readers

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

Comments

[Kayboe:]

This being Tuesday, 9/30/08 -we all know what happened yesterday. Nice call Jeff with PSQ, SH and DOG! For gold it turned out that GLD was a better choice than GDX. "Can't win-um all." *Still good calls overall.

2008 Sep 30 10:24 AM

[adan:]

interesting info, thanks!

ps - i also prefer gld :-)

2008 Sep 30 12:23 PM