ETF Update: Investing in India
Successful investors know that opportunities exist around the world. Some of the best performance in 2009 came from non-US investments. While there is a correlation in performance among the various global economies, it is important to consider secular trends in key nations.
Our trading approach takes us in this direction when indicated. Let's review this week's market picture, and then focus on India.
Each week we provide a
list of sectors that we expect to have the best performance over the next three weeks. 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. While our ratings share characteristics with momentum
and relative strength approaches, there are important differences.
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 model provides a nice feel for the overall potential of the
market. It is not the forest nor the individual trees, but
something in between. 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 continued risk. The key elements are as follows:
- 91% of our ETF's in positive territory (up a touch from 84% last week). The median strength rating
for the overall list is a plus 32 (up nicely from +21 last week). A score
of "0" implies the average long-term ETF expectancy.
- We see continuing reductions in risk, with 58% (down from 66%) 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.
This overall picture has been about the same for several weeks, but is showing continuing improvement.
The Spotlight on India
Our featured ETF this week is the Invesco PowerShares India Portfolio (PIN).
The PowerShares India Portfolio (Fund) is based on the Indus India
Index (Index). The Fund will normally invest at least 90% of its total
assets in securities that comprise the Index and ADRs based on the
securities in the Index. The Index is designed to replicate the Indian
equity markets as a whole, through a group of 50 Indian stocks selected
from a universe of the largest companies listed on two major Indian
exchanges. The India Index has 50 constituents, spread among the
following sectors: Information Technology, Health Services, Financial
Services, Heavy Industry, Consumer Products and Other. The India Index
is supervised by an index committee, comprised of representatives of
the Index Provider and members of academia specializing in emerging
The fund P/E ratio is about 19.5 and price-to-book is about 3.5. The top three holdings constitute 30% of the fund, but the concentration drops off rapidly after that. Holdings are 25% energy, 18% information technology, and 13% financials.
The model operates from technical criteria, so it is always fun to look at the chart.
The year-over-year performance is excellent, but the sector is still only back to the levels from last autumn. Depending upon your flavor of technical analysis, an advance from current levels might have some room to run before reaching resistance. (I always hate to draw lines for these things, since I do not want to misrepresent the modeling process. The key is that the TCA model likes this chart. While we know the general approach, we can only infer the reasons).
Other ETF Experts
I always take a look at comments from the ETF expert community for additional insight on our highlighted sector. There has been surprisingly little comment on PIN. Michael Johnston at ETFdb has another nice article, this time on the top ETF's from 2009. Here is what he wrote about India.
Not to be outdone by fellow BRIC economies, India turned in an impressive 2009 that saw INP gain 94%. This ETN’s big jump came in May, when the election of the pro-business Indian Natural Congress sent equity markets up 25%
in a single session. But Indian equity markets surged throughout the
rest of the year as well as the economy resumed its impressive
expansion following the global downturn.
A few years ago when I started writing about ETF's I had some very helpful discussions with Mick Weinstein, Seeking Alpha's Editor-in-Chief. In our telephone conversation, he asked some good questions about our model, including what I investigated about the fundamentals. I explained that we always examined the fundamental background for every investment, including trading positions. The reason is that we do not have a "black box" system where the model makes the ultimate choice. I always consider every position, reviewing sector concentration and the factors behind the trade. If something happens, I am prepared to intervene in the trade.
Mick gave some very wise advice. He encouraged me to write about the fundamentals behind each choice. The result: Anyone who follows our weekly ratings also builds up knowledge about each of our featured sectors, one week at a time. Thanks, Mick.
A main theme for investors in India is the presence of human capital and the potential for growth. Here is a nice article on the subject from The Motley Fool.
When comparing India with China, one should also consider the political regime. Here is a good analysis of that subject, also from The Motley Fool, examining the "dictatorship premium."
On the negative side, there is the matter of intellectual property, treated nicely in this article with an emphasis on drug development.
Weekly TCA-ETF Rankings
about 2.7%% last week, compared to 2% for the S&P 500. The model has helped to keep us fully invested at a time when many thought the rally was ending.
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.
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 which was not updated this week, probably due to the holidays.
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.