ETF Update: From Russia, with Oil

Things are looking up for Russia.  The reason?  Energy.

Oil prices have been moving higher.  This alone is bullish for many Russian companies.

There is also a new factor — the opening of the China pipeline.  I'll look at how to play this important development, but first some background on our approach.

 

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.

Russia in the Spotlight

We invest in Russia via the Market Vectors Russia ETF (RSX).  The fund includes a 37% concentration in oil and gas and 17% in iron and steel.  No single holding is more than 10% of the fund and the top five total about 40%.  The P/E ratio is 16, the price-to-book is about 3, and the dividend yield is only 1%.  The valuation ratios are generally higher than those of US or global energy companies, so some investors might prefer the global names (some of which we also own).

Our ETF universe was selected to reflect diversity, liquidity, and low trading expenses.  We carefully identified one sector of each type to be part of our universe of 56 ETFs.  We now also review developments in a wider group (available to subscribers on request) to consider new entrants.

The RSX ETF emerged from our "penalty box" this week and it also has a high rating.  Here is the chart.

 

 

The sector has shown great strength since the start of the year, and seems to be holding support.  The Felix model looks for this type of strength.

An analysis of other viewpoints suggests that there is also fundamental support.

Other Opinions

We always survey commentary from other experts on the ETFs in our buy zone.  These viewpoints highlight factors underlying the recent strength.

The most exciting feature about Russian energy stocks is the link to China.  Start with a recent report on the Chinese energy situation by the US Energy Information Administration.  After describing the gap between consumption and domestic production, the report mentions imports via pipeline.  This map shows the crucial geography of the sources.

• The Russian pipeline started operating one month ago.  CNN reports on the significance and expected flow rate.

• MarketWatch notes the bullish potential, but emphasizes the technical considerations.

• Robert Hsu, writing for TheStreet.com, explains why Russia is likely to outperform the other BRIC's, especially in times of inflation.

• ETF Trends correctly predicted some sideways trading and now notes the potential for Russia to outperform Europe.

• ETF Daily News opines that RSX might see profit taking.

Felix is picking up the bullish signal, but real gains will depend upon economic factors and energy prices.

This Week's Results

Even Felix, the more cautious of our two systems, has fully participated in the market rally.  The sector ratings have reflected the strength.  Until recently there have been many good choices to buy.  While the choices have thinned out, we hold the top five positions, all of which have solid ratings.

Weekly TCA-ETF Rankings

The average rating is weaker than in our last report, but there are several attractive sectors.  We remain 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.

UPDATED:  Oscar now included after omission in the original.

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.