ETF Update: Playing Defense

In volatile and declining markets, many investment managers decide to play defense.  Our TCA-ETF model uses a combination of technical factors to capture Trends and Cycles with a touch of Anticipation.  It is also a good guide to market fundamentals.  Why?  Looking at many different sector ETF's provides a great snapshot of the collective market wisdom.  (For new readers, there is a more complete description of our methods at the end of the article.)

Dividends:  An Element of Defensive Investing

The iShares Dow Jones Select Dividend Fund (DVY) is a good choice for investors seeking high yield without excessive concentration in a few stocks.  The fund yields 4.6% and has a beta of 1.0, both attractive to a yield-oriented investor.  No single stock represents as much as 4% of the fund.  This can provide an illusion of diversification, however, financial names represent over half of the fund.

Bespoke Investment Group took note of the recent reach for yield.  They analyze another dividend ETF from Power Shares, (PEY) which is up 65% since July 15th.  Check out their full article for their typical great charts and also a fine discussion of ETF's for preferred issues (not a part of our universe).

Weekly TCA-ETF Rankings

Good trading systems are designed to work in the long run and in many different circumstances.  When events are extremely unusual, humans are left guessing.  Trading systems are no better when it comes to markets for which there is no real experience.

Some of our positions have maintained good ratings for several weeks, but the move to inverse funds left us with only marginal exposure on Friday.

The news flow has been so great and the effects so violent that the swings have been like a giant roller coaster.  In addition, with trading rules changed without notice, wild and unpredictable moves result.

The system adopted a defensive posture last week, guiding us to a bearish stance in the weekly Ticker Sense blogger sentiment poll. Prices and ratings reflect Thursday's close, but the ratings did not change too much after a single day, even a big one like Friday.


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.

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