ETF Update: Dr. Chu Points to Nuclear Energy

Dr. Steven Chu is the Nobel Prize winning physicist who now serves as the U.S. Secretary of Energy.  He is a brilliant man from a family of leading researchers and scholars.  He is also charming, engaging, and influential.  From my perspective, the conclusion is an easy one:  When Dr. Chu speaks, we should listen.

Chu

I was a bit skeptical about the pop in the "nuclear stocks" after the mid-term elections, but the political landscape seems to be changing.  We can see the effect in our weekly analysis of the ETF markets, but I want first to discuss the background factors.

The Obama administration started off with a tilt toward alternative energy, but last week there was a significant change.  As part of what is being hailed as a new era of compromise with Republicans, Dr. Chu included nuclear as part of the alternative energy program.  This shift recognizes regional and political differences, so it could be important.  As is the case with any compromise, there was an instant reaction from nuclear opponents.  I have no firm prediction on how it will eventually play out, but the odds clearly have shifted.

The fundamental change is reflected in the behavior of the stocks.  I'll get to that, but first a little background on how we approach sector analysis.

Background

Traders all seek rewards but they have differing appetites for risk.  It is important to find a method that suits your personality and needs.  Our short-term trading systems are basically Trend-following, but also include recognition of Cycles and a touch of Anticipation.  Since we apply the method to ETFs, we call it the TCA-ETF system.  We follow two versions of this method, designed for two hypothetical clients (Oscar and Felix) with different needs and risk appetite.  [New readers can find more information about the models at the end of this article.]  For convenience, we have named the models based upon the intended clients.

Featuring Nuclear Energy

We trade nuclear energy via the Van Eck Global Nuclear Energy ETF.  The fund "seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAXglobal® Nuclear Energy Index."  There are only 24 holdings, with a range of market caps.  The top five make up about 40% of the fund and the top ten another 25%.  The holdings include uranium mining, storage, and enrichment stocks as well as those involved in plant construction and power generation.  The largest geographical weight is in Canada with the U.S. second.  44% of the fund is outside of North America.

The price and fundamentals are attractive and interesting.  The P/E ratio is about 20 with a dividend yield of 1.7%  The beta is only 1.2.  The sector has recently moved by nearly 20%, but is up less than 10% on the year.  Here is the chart.

NLR one year

You can see the recent move as well as the price consolidation over the last few weeks.  Some might see an upside down head and shoulders, although our models do not identify that type of pattern.  I always look at various time frames in charts, and this time it is especially illuminating.

Nlr 3 year

This chart highlights a period I regard as important — the time right before the fall of Lehman in September of 2008.  With any stock or sector it is interesting to ask whether this initial price target has been regained, and whether conditions now are better or worse.  By that test, there is room to run.

Other Opinions

We always survey commentary from other experts on the ETFs in our buy zone.  There are some interesting comments on NLR.

There is not too much discussion of this sector, despite the fundamental and technical changes.  It is currently our top-rated holding for Felix.

This Week's Results

Felix, the cautious approach, has fully participated in the market rally.  The sector ratings have reflected the strength, and nearly 70% of the stocks are out of the penalty box.

I am seeing new sectors emerge from the penalty box on a daily basis.  We are closely watching KBE, for example.

Weekly TCA-ETF Rankings

We are currently fully invested in our Felix ETF program and also for those following Oscar.  This flows from the positive market ratings that we report in our (almost) weekly update on the market.  (We are happy to report and discuss performance with interested investors.  We also offer a report on how we use the models, and a free weekly email update.  Write to etf at newarc dot com.  Our actual trading is a combination of both models and some weekly timing).

Please note that these are not recommendations.  Investor needs and risk tolerance varies.  We hope everyone finds the ratings to be a useful supplement to their own work.  The recommendations can change quite rapidly in this environment.  It is quite possible for investors with different time frames to reach opposite conclusions about a specific trade.

Here are the current rankings for both Oscar and Felix. 

  Felix 12-15-10

Oscar 12-15-10

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  We also have free reports, available upon request to etf at newarc dot com.  These reports describe how we use the system, compare results from Oscar and Felix, and contrast the method with our long-term trading approach.

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.

Oscar and Felix. We follow two versions of this method, designed for two clients with different needs.

  • Oscar believes in the long-term strength of the economy and the stock market.  He has a lovable and irrepressible enthusiasm.  When things go wrong, he steps back for a bit, but soon tries again.  He expects to do better than others during good times.  Oscar understands that this approach involves more risk.  Oscar is opportunistic.
  • Felix also has a positive long-term outlook, but he is something of a fussbudget.  He is much more cautious, with an emphasis on capital preservation.  He is perfectly willing to step aside from the market when there are signs of danger.  He knows that he will miss some moves, but that is OK.  He scores big gains when the market moves lower and he escapes the loss.

There is more detail on Oscar and Felix in this article.  There is more about the Penalty Box here.

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