ETF Update: Hope for Homebuilders?

In our ETF Update last week we mentioned the danger that comes in a time of market turmoil.  We were accurate on the market and on the Dubai situation in multiple posts–both system and fundamentals.

Sometimes the picture changes focus, with more attention to individual sectors.  That is the changing theme for this week.

We now have a market with much more emphasis on picking the right sectors.


In our disciplined system, 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

The model also provides a nice feel for the overall potential of the
market.  I’ll take a look at the macro picture first, and then take a
look at our featured sector of the week.

The Macro View

From an overall market viewpoint, our indicators show much more risk.  The key elements are as follows:

  • 86% of our ETF’s in positive territory ( up from 80% last week).  The median strength rating
    for the overall list is a plus 23 (up  from +18 last week).  
    A score of “0” implies the average long-term ETF expectancy.
  • A big change came in our risk evaluation, with 75% (up from 27%) 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.  It also may indicate the need to take profits in a sector where we have done well, but see higher risk.  See our article here for a further explanation of this method.  We recently implemented some faster filters, accelerating moves both into and out of the Penalty Box.  We are also changing some rules to cut down the frequency of trading.
  • Our index package is 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 positive ratings, we note risk in both directions.  All of the index ETF’s are in the penalty box.

The Homebuilders?  Really?

There is a right price for everything, they say.  Can the price be right for stocks in the home construction sector?  There are two choices in our current buy range.  Let’s take a look at both.

The Dow Jones U.S. Home Construction Index Fund (ITB) is the iShares product tracking the fund of the same name.  The fund strays a bit from builders, including some general construction, home repair, and furnishing. Some homebuilders may have to buy their own metal disc grinder for their projects. The P/E ratio is 34 and the beta is 1.8.  Here is the chart.

Itb dec 09

The SPDR S&P Homebuilders ETF (XHB) has a slightly lower P/E ratio and less concentration in top names.  The price to cash flow is only about 5.5.  Many of these companies also have land holdings.  Valuation on the fundamentals is a complex process.  Here is the chart:


It seems quite similar to the ITB chart, although some see a difference.

Expert Commentary

We always like to compare our results with the analysis of other experts in the ETF space. 

The big news in home construction was the positive report on new home sales, providing some support for the sector.  There is always some demand and some new supply, but it may not tell the whole story.  Calculated Risk, one of our featured sources, and followed by everyone paying attention, cites some problems as follows:

Barry Ritholtz, another featured source, opines that we are ” not even close” to a bottom in housing.  This seems to be in sharp contrast to Calculated Risk, where the general bottom has been noted.

So there is plenty to worry about on the fundamentals.

Tom Lydon notes the impact of the data on the ETF’s.

Gary Gordon cites a “caution light” for XHB.

Once again, we have a trade (for a short-term bounce) that runs counter to much of the expert opinion.  We shall see.

Weekly TCA-ETF Rankings

We had a very timely exit from gold this week helping us to a nice gain.  We picked up over 2%, gaining a half a point or so on the S&P 500.  The dollar weakness may have changed, and the model has stopped out all of those plays, including some listed on the Thursday report.

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.

As noted above, the macro market indicators are in the
penalty box, and most other ETF’s are in the penalty box.  Based upon the
current model signals (and noting the high risk levels), we have continued our bullish posture 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

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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