ETF Update: High Risk, but Some Opportunity

Here a "A Dash" we examine markets with different time frames.  Our most successful investor program takes a long view, but we also look to shorter term signals for trading programs.  This week we see high risk in most sectors, but an opportunity for the careful trader to stay with the rally.  This eclectic strategy has been very effective in recent months.

There is plenty of skepticism.  That means that most missed last week's big move.  A disciplined approach that looks for opportunity can help  with this challenge.

Our Approach

We
study sectors continually, looking at the charts and ratings for
hundreds of ETF's.  Each week we provide a list of our top-rated
sectors for the next three weeks, along with some of our current
observations.  ETF investors can check out the list and compare our
findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of Anticipation.  Since we apply
the model to nearly 300 ETF's, we call it the TCA-ETF system.  (For new
readers, there is a more complete description of our methods at the end
of the article.  We also have a free report with more detail on the system and results, available on request.)

The Macro View

From an overall market
viewpoint, our indicators continue in positive territory, although it is a close call.  The key elements are as follows:

• We now find 95% of our ETF's in positive territory (99% last
  week).  The median strength rating for the overall list is 25.  We are changing from mean to median strength in our weekly reports, because the median is a more helpful and robust measure.  (A score of "0" implies the average long-term ETF
  expectancy.)
• 95% (up from 86%) of our sectors are in the "penalty box."  This means that they
  are currently disqualified from the buy list for technical reasons. 
  You can think of this as a sophisticated "stop loss" rule, often
  applied in advance.
• Our index package remains slightly positive.  For this rating we look at the
  ETF's
  (both long and short)  for the S&P 500, the Dow, and the Nasdaq. 
  You can see these ratings is the results table for this week.

Despite the many risky sectors, the model is finding some good trading choices.

A Look Back at Choosing an ETF

In our last update we highlighted weighting as a factor for traders in choosing an ETF.  We noted that those with a longer time frame should be reading the prospectus and looking at many other considerations.  We are delighted to note some wise advise on this front.

Patrick, one of our best commenters, cites tracking and expense ratio as big considerations.  Well put.

David Merkel, one of our favorite and featured sources,  also has an excellent article on ETF selection, citing many factors relevant to long-term investors.  Check it out!

Also, Abnormal Returns notes that the size of the fund makes a big difference, impacting both the ability to trade and even the value of underlying assets.

Focus on Asia

This week's sector focus is the iShares MSCI Hong Kong Index Fund

(EWH.  The fund has a beta of about 1 and a P/E ratio of around 25.  Most investors do not know much about selecting individual stocks on the Hong Kong market, sot the ETF is a good way to play China growth and dollar weakness.  The top ten holdings make up about 65% of the fund.

Here is the chart.

The model has noted some basing and a possible breakout.  It is a promising story (we bought at the close on Thursday) but it could change quickly.

Gary Gordon notes the key question:  Will the Asian growth continue as many expect?

Weekly TCA-ETF Rankings

We
had
a gain of over four percent last week, roughly in line with the S&P 500.  Our current
holdings are not near the top in strength rank, but they still have
good ratings.  Our testing has shown what Vince calls "robust"
results for anything with a positive strength rating.  We do
not buy ETF's in the penalty box or those with poor liquidity.  We
provide these ratings as information for readers who may not trade as
frequently as we do.  Those signing up for our free weekly email update
can also get the entire list.

[We also note that two weeks ago we
implemented what our modeling guru, Vince Castelli, calls an improved
filter.  While the underlying model has not changed, the inputs used
reflect our best efforts to improve the signal-to-noise ratio.  We have
advanced the timing (the Anticipation factor) reflecting the recent
"hot money" tendencies in ETF's.  This means earlier recognition and
also faster moves to the penalty box.  Those tracking our entire data series should keep this in mind.]

As
noted above, all of the macro market indicators remain positive,
although most are in the penalty box.  Based upon the current model signals, we have maintained (by a whisker) our bullish position in the Ticker Sense Blogger Sentiment poll.

Here
are
the top sectors from our expanded universe of 280 ETF's.  The list
also includes the values for the broad market ETF's and their
inverses.

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.