ETF Update: Regional Banks on the Move

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Includes: FBT, FNIO, IFNA, ITB, KOL, KRE, PKOL, XHB
by: Jeff Miller

Following a disciplined system helps to take the trader out of a losing viewpoint. Two weeks ago, like many others, we were expecting selling and noting the top of the trading range. When the market broke through, the trader needs a way to react.

We shared the general nervousness about the recent rally and Friday's employment report, but the system kept us invested for the breakout. We did some small hedging around Friday's announcement, reducing positions slightly and bought the dip Friday morning. This cost a bit of performance, but we felt it to be wise on a risk/reward basis. Our objective is to have the "right" system position at the end of each day, with few exceptions.

Our method looks beyond the general market averages to consider the behavior of a big universe of market sectors. Since it combines Trending behavior, Cyclical behavior, and adds some Anticipation, we call it the TCA-ETF system. (For new readers, there is a more complete description of our methods at the end of the article.)

The system shows a much brighter picture for the overall market, reflected in the breadth of sector strength and the ratings for the market averages. Consider the SPY chart as a typical example ().

Spy

One recent high has been successfully challenged. Now we face another.

Among the various sources of sector strength, financial leadership, especially regional banks, is notable.

Featuring Regional Banks

We follow the regional banks using the SPDR KBW Regional Banking ETF (NYSEARCA:KRE). The current P/E ratio is about 22 and the book value is .86. There are many entries, so there is little concentration, especially in this equal weighted index. The group moved from #153 in last week's ratings, to $5 this week. We made the buy last Monday.

Here is the chart ().

Kre

The model picked up a good move, and the group is challenging the recent high from May. The sector is still down on the quarter, and down 36% YTD, so we are certainly not buying the top.

Other Pundit Comments

Tom Lydon notes the sector as one of the week's big gainers, but also expresses concern about bank failures. He seems negative overall.

ETF Trends also worries about the "endangered" regional banks.

This makes us the contrarians in the sector.

Weekly TCA-ETF Rankings

With 99% of our sectors in the "buy" range, we continue our bullish posture from last week.

We had another great week, up 5.6%, beating the S&P 500 by 3.3%.

Based upon the model signals, we continued our bullish position in the Ticker Sense Blogger Sentiment poll.

Here are the top sectors () from our expanded universe of 277 ETF's. The list also includes the values for the broad market ETF's and their inverses.

080709 expanded

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.