ETF Update: A Nugget of KOL Defies Shrinking ETF Breadth

Our sector rankings for the week show two important themes:

  1. Decreasing breadth. As of Thursday's close, the basis for this report, only ten of the fifty-one ETF's in our universe qualified for a "buy" rating.  (Please see the section at the end of this article for an explanation of our approach.)
  2. The Market Vectors Coal ETF (KOL) defied the market trend.  It posted a small gain for the week and moved into the #1 position.

Friday's selling sent more sectors to our "penalty box" and also confirmed a "sell" rating on the DJIA.  The S&P 500 and the NASDAQ remain marginally positive, so our vote was "neutral" in this week's Ticker Sense blogger sentiment poll.

A Closer Look at KOL Fundamentals

Market Vectors Coal (KOL) was launched earlier this year.  It tracks the Stowe Coal Index — 39 holdings, with 55% US representation.  The top ten holdings reflect about 60% of the index, but no single position is greater than about 8%.

Overall demand.  Steve Halpern at Blogging Stocks draws upon The Global Bull Market Alert newsletter to describe the strong case for coal demand.  He writes as follows:

…coal provides 25% of the world's energy and generates about half of
the electricity in every state in the United States, except California.

Coal plays a key role in the production of steel, with
approximately 70% of the global steel production depending on coal as a
source of energy. And the price of coal has been soaring to record

China play.  Halpern cites some key factors behind the current strength, including China's dependence on coal (80% of power capacity), disruptions in China from the earthquake, and reductions in supply from Australia due to weather.  Australia is the world's leading coal supplier.

Stock versus commodity price drift.  Steve Bernard at ETF Charts notes (as of a week ago) a disparity between commodity and stock prices for the group.  This is something to monitor, so check out his nice charts of both.

Overall ETF Selling

The general stock market pressure is reflected in the overall pattern of ETF's, as John Spence notes at MarketWatch.  John cites the weakness in home construction and the relative strength of commodity funds.

The same pattern can be seen in our rankings for this week, with the added benefit of our quantitative scoring method.  The report shows fewer attractive sectors for the coming month.

60508 rankings

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.

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  • Dileep Srivastava September 16, 2008  

    Would be keen to know what stocks constitute KOL and their weightage by volume – are they just US based companies or from Asia, Australia, South Africa, etc as well. Can I pick this information up from your web site.
    Thanks and regards,