ETF Discipline for the week of 7/29
This blog executes a basic ETF trend-following strategy that seeks to let winners run and cull losers when their trends break. In a bull market, I have achieved above-market returns. In bear markets, defined by a downtrend trend in SPY and /or IWM, I exit and look for individual uptrends in bond or inverse funds. I may reduce the delta of my positions in the short term with puts.
News and Economic Summary
Retail sales are holding up. Although variable in different regions, manufacturing is strong, led by a strong durables report. Overall economic activity, however, according to the national activity index, was up only slightly. The sluggishness is attributable to the housing slowdown. Although housing prices are firming, existing sales are down. Higher mortgage rates are bringing more homes to the market. Supply is tight due to a drop in volume from foreclosures. Although well off the low, mortgage rates dropped slightly last week. Average employment is down slightly.
Sentiment metrics, the Bloomberg Consumer Comfort and Consumer Sentiment reports were sharply higher. The VIX stayed below 13.5 all week, supporting the relative complacency.
The S&P 500 broke the sharp uptrend of the past month, as most ETF's rolled over slightly into bases. In most cases, the impetus was reaction to a mixture of earnings reports. If the weak support established by Friday's rally off the day's low holds, a new, more sustainable trend could result. If this support fails, it is a long way down to support at 160.
The small cap ETF (NYSEARCA:IWM) has a similar chart, showing the break of a steep uptrend. A rounded top is forming-if it continues, the formation could signal a sharp drop. More likely, new support will appear at the SPY 165 area.
Core Relative Strength
The core ETF relative strength chart shows small caps (IWM, red) as the unchallenged leader, and the roll-off in relative strength. The graph thus exposes this week's fund of choice, healthcare (XLV, orange) as the strongest fund in this market. XLV is pharmaceutical heavy. Nearby is international stocks (EFA, green), which are recovering; however they are also showing a fall-off in strength. Tech stocks (XLK, lavender) have been choppy as earnings reports released, but they may be recovering. XLK had a big boost from AAPL last week.
Sector Relative Strength
Biotech (IBB, dark cyan) continues to dominate the sectors. Internets were off a bit, possibly due to ZNGA, which lost 14% on Friday. Regional banking (KRE, brown) came in at 10%, tying the internets (PNQI, orange). Industrials (NYSEARCA:XLI) are steady and rising, but remain below small caps (IWM, red), which came in at 9.5%. Tied with IWM is aerospace (PPA, blue).
Actions this Week
Transportation (IYT, brown in core chart) slipped, hit my stop and was sold. I'll stay out of it unless its relative strength surpasses IWM. Real Estate (IYR, pink in core chart) rolled back and took a hit, and was sold. Although way down, IYR is not ready for a rebound.
I bought Regional banking (KRE, brown in sector chart), but sold when it broke down on Wednesday. I still believe in the sector and am following it lower with a buy stop. I increased holdings of BBH and bought IBB, PPA and FDN.
I currently hold IBB, IWM, BBH, XLV, FDN, KRE, XLK, and PPA. Stocks I like and hold are LMT and INTC.
Guess on Short Term Market
Essentially no change from last week: Higher interest rates will benefit many economic sectors in the short run, as long as they are not crimping manufacturing growth. The market has leveled off, but is not dropping on negative earnings and economic reports. While the market may spasm on a Fed tightening, I don't expect the overall uptrend derived from a recovering economy to reverse in the next few months. I think Bernanke is trying to ease stimulus at the same rate as the economy generates its own internal stimulus.
Into the fall, there is a looming threat of a congressional fight over the debt ceiling. The last time this happened, the drop in the markets cost investors trillions.
I will increase my IWM holdings if it rises next week.
Have a great week!
Additional disclosure: I may purchase IWM and KRE next week.