Can You Play ETF’s for a Rebound?

There are many great reasons to invest via ETF's — low costs, focus on sectors, diversification, and others.  We embrace these good reasons in our TCA-ETF trading program and have written about the ETF advantage for more than a year.

Our methods got our long-only fund out of harm's way for the worst of it.  While we do not often do explicit market timing with short ETF's, preferring to use these for hedges, that would have worked even better over the last two months.

For an investor, trader, or fund manager, it has been a challenge to get the timing right.  It is fine to say that last week was the biggest gain in DJIA history, but you had to be invested for the big day.  If you were not there in advance, how many people would really chase the rally?

Our ETF approach has had us out of the market, a success.  It was a little slow, with some losses from hanging on with gold stocks and some energy holdings when there was really no safe haven.  It will also be slow getting back in.

Sleeping Well

There is a lot to be said for getting out when the risks were high, as we noted in When Cash is King.  We are confident that when the market stabilizes and sectors start to emerge, our TCA-ETF model will identify some good choices.  We are equally confident that it will miss the initial rebound.  (For new readers, there is a more complete description of our methods at the end of the article.)

Is there an alternative?

Even a great sector model like ours is not geared to catching the bottom.  That is why we are closely following our Gong Model, which uses various technical criteria to find an  "all clear" signal for investors.  This does not mean that we will have an instant winner.  It means that there is a dramatic change in the risk/reward.

ETF investors can act on this in two ways:

  1. Invest in a general market long like SPY or QQQQ, choosing the Gong Model over the TCA-ETF approach.
  2. Pick stocks.  Sometimes the market does not favor the ETF approach.  It is important to recognize this.

We plan to do a little of both in our fund.

Stock-Picking

One approach to finding stocks is to take hard look at the strongest survivors.  David Merkel at The Aleph Blog, has been one of our featured sites from its inception.  We admire David's disciplined approach to finding the right stocks and rebalancing on a regular basis.  These are important keys to success.  David has a list of stocks from his most recent screen.  Investors should carefully read his analysis and logic.  Take a look at your holdings, and see if they are on the list.  For our individual long-only accounts we checked the list to take a careful look at anything not mentioned.

Charles Kirk, another of our featured and favorite sites, uses regular and successful stock screens to pick winners.  We were particularly interested in a recent post where he discussed passive investment methods.  This is a great source of ideas and the stock versus sector discussion.  (And also many thoughtful links).

James Altucher, writing for RealMoney, highlights many interesting stocks, carefully tracked and discussed on Stockpickr.  Today's edition highlights stocks from this week's Barron's, selected for favorable factors like insider buying, cheap losers, dividends, and other factors.  (Full disclsoure:  We write as a contributor to RealMoney.  Regular readers know that we bought the service before joining and we are long-time fans of James Altucher.  It is worth the price).

Our own approach is a bit different, a bit more optimistic than David's.  We are looking for stocks that fit one or more of the following criteria:

  1. Solid stocks on balance sheets and intrinsic value that can explode if the perception of the economy improves.  (Out of favor, but that is what the savvy investor seeks).
  2. Stocks that were taken down during forced selling by hedge funds.  These are companies that are not really sensitive to economic concerns.  The price declined with the general averages.  When the extreme volatility declines, these will be winners as managers think more carefully about individual issues.
  3. Micro-sector plays.  Some sectors, like energy, have declined with the price of oil.  Not all energy stocks are equal.  Some maintain strong earnings power, even in the face of lower oil prices.  Regular readers know that Transocean, Inc. (RIG) is a favorite holding meeting this criterion.  There are others.  The key is that not every "energy" company is immediately sensitive to oil prices, even if the stock price is.

We are making these adjustments for our clients right now, and will share some of the choices in future articles.

Summary

We are obviously big fans of the ETF and sector approaches, but it might not capture the first part of a rebound, if and when we get one.

Weekly TCA-ETF Rankings

We have been out of the market in our fund, since the charter is basically long only.  For readers interested in our program, we have a long-only method and one that embraces more market timing.  We are working on a report that tests these alternatives in a variety of circumstances.  Current reports are available to any interested reader — both the TCA-ETF method and the Gong Model.  Just use the "email me" link at the top left of the page.

We have never seen readings so negative.  Despite this, we switched to neutral in the weekly Ticker Sense blogger sentiment poll, because we anticipate the imminent ringing of The Gong.  Readers need to check out the model description to realize just how negative the picture has become.

101608

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.

You may also like