ETF Update: Cash Is Still King

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 |  Includes: DOG, DVY, GDX, IAT, ITB, IYG, PSQ, SH
by: Jeff Miller

The parade of advisers on financial television has a new and growing club.  These are people  recommending: "You should be in cash, since nothing is working."

What they really mean is: "You should have been in cash, since nothing worked."  Where were they a month or so ago?

In most market climates there are some sectors that perform well.  There's always a bull market somewhere....well, nearly always.

Until the last month, declines in some ETF's were matched by dramatic increases in others.  It was sector rotation, but the pace of the moves was accelerating.  Higher energy prices, for example, implied better profits for some sectors but increased costs for others.  When oil prices moved sharply lower and the dollar strengthened, all of the commodity-based ETF's took a hit.

That was the last "defensive" group.  Our TCA-DTF approach looks not only at Trend but also for Cyclical opportunities.  We also try to Anticipate, thus the system name. 

Many managers have called this the most difficult market of their careers.  Our model also struggled for a few weeks before giving the highest rankings to defensive sectors and the index inverse ETF's (click on chart below to enlarge).  (For new readers, there is a more complete description of our methods at the end of the article.)

We normally feature ETF advice from other experts, but they seem to agree with our model.  There is a general lack of ETF recommendations.  Readers might want to check out the commentary and excellent charts from David Fry, who features some of the inverse ETF's.

Weekly TCA-ETF Rankings

We traded in and out of some holdings.  This was not because of any change in the model ratings, which have had consistently high scores for the inverse ETF's.  As we noted in last week's update, we use these inverse sectors as a hedge.  When we have little long exposure in front of a binary event like the "bailout" legislation, we may choose to lift the hedge.  This time it would have been better to close our eyes and just stay short.

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

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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.