ETF Update: Cramer and Harvard Agree on China

The story of the week for US investors was the disappointment with Treasury Secretary Geithner. There was plenty of speculation about his plan to deal with the troubled assets on financial balance sheets. When the plan proved to be more of an outline, US equities turned South. Diverse sources including Jim Cramer and Harvard University suggest shifting attention to China. We also see this theme playing out in recent trading.

Our Perspective

We track the changing prospects and fortunes of market sectors through a systematic analysis of Trends and Cycles.   Our TCA-ETF model includes technical factors that have proven most effective in sector analysis.   While we use the ratings for actual trades in our daily and weekly programs, the rankings have a more general value.  Anyone trying to gauge overall market strength has to choose between the forest or the trees — market averages or individual stocks. Looking at sectors is a useful alternative.   (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Why China?

Jim Cramer believes that there is always a bull market somewhere. On his TV program Tuesday he unloaded on the new Treasury Secretary.  To put it mildly, Jim is not a fan!  Even if you miss his program, his opinions get wide circulation.  Blogging Stocks does a nice job in capturing the Cramer viewpoint in an article entitled Load up on China after the Geithner gaffe.  Here is a key quotation:

How perfect is China? We have producer price inflation down to almost zero, and rate cut possibilities as far as the eye can see. In our country, all we have heard is “pushing on a string.” In their country, all they know is that when the Chinese central bank loosens, wondrous things happen, including a 29% gain in the index. That gain is so glaring that you can be emboldened about it. You know that they have just started to put China to work and the inventories of all metals could be worked off quickly and the infrastructure products just started.

The Harvard University portfolio also highlights China.  [Full disclosure:  Cramer went to Harvard.  I write at Cramer’s site.  I got my PhD from the “Harvard of the Midwest.”  Harvard has an investment style different from Cramer’s.  Got it?]  The Harvard portfolio has China as the #2 holding, analyzed nicely by my RealMoney colleague Paul Kedrosky.

When Cramer and Harvard agree, perhaps we should pay attention.

David Fry’s technical analysis — always interesting — focuses on movement rather than direction.

How to Play China

We invest in China through the iShares ETF, FTSE/Xinhua China 25 Index Fund (FXI).  We also featured this ETF in December.   We like to feature new sectors, but we respectd the rankings.  This ETF is a good way to get a pure play on China.  Check out our comments from December.

Meanwhile, the model has made a fresh assessment.  Here is the chart:

The model seems to see some good basing action.  Perhaps we should learn from the model!

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, February 12th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. During the last week we picked up a couple fo points against our benchmark, the S&P 500, but not in the fashion that we prefer.  We lost about 2.5% and the market lost a lot more.  We are still in what most perceive to be a trading range.  We do best when there is a break out form the range.

Because of the current ratings, we are continuing our neutral stance in the Ticker Sense Blogger Sentiment poll. We have twenty of fifty-seven sectors are in the “buy” range, and others that are others that are quite close.  We have found enough good plays to be fully invested, and we expect the overall market to turn higher.  Meanwhile, our “official” posture on the overall market is neutral — at least for another week.

There are many interesting moves in this week’s ratings.  Readers should go beyond what we feature, including the dramatic move in RSX.  Sometimes the ratings change quickly and dramatically. 

We are also interested in reader suggestions about new ETF’s for our universe.

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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  • Premium Collector February 15, 2009  

    Nice article. I’ve referenced it on my blog here.
    I check your site often and appreciate your thoughts. We trade ETF’s a lot and find your posts helpful.

  • Michael February 16, 2009  

    Just wondering why you think the Coal miners Index KOLis number 2. Im not seeing it on the charts. Is there some underlying fundamental i am missing? I was just surprised to see it so high.

  • Dustin February 24, 2009  

    “When Cramer and Harvard agree, perhaps we should pay attention.”??? Wow. I used to respect this blog for it’s analytical, contrarian approach to markets. This article makes me think twice about that.

  • Jeff Miller February 24, 2009  

    Dustin — Our main contribution in the weekly ETF Update is the use of our system to get a unique view of the market — a focus on sectors with a one-month time frame. I start with a sector to feature, and then see if there is anyone else on the same page. In short, the story is about our methods, but we always look for someone else to feature.
    I think you might have missed the jocular tone of this sentence, especially in the context of the prior paragraph.
    You are quite correct in thinking that we do not just blindly follow popular authority figures.
    Thanks for your comment, and the opportunity to elaborate.

  • Jeff Miller February 24, 2009  

    Michael – You may have been right! KOL did not last long in the top eight. The model likes charts where a sector has fallen, built a base, and shows signs of a rebound. There are other elements, of course, but I often see that. If the rebound does not come, the ranking drops quickly.
    Good question!