ETF Update: Sectors Reflect a Deteriorating Market

At "A Dash" we believe that there is always a bull market somewhere.  Jim Cramer has made the statement famous, but it has always been the guiding concept for those following a sector rotation strategy.

Our own approach to finding the current bull market includes studying recent Trends, an established market principle, as well as identifying Cyclical behavior.  To stay a step ahead of the crowd, we use somewhat "faster filters" to add Anticipation to the mix.  We apply this to a universe of ETF's representing many important sectors, resulting in our TCA-ETF approach.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

This Week's Lesson

Each week we expect the model to provide a lesson about the market as well as a suggestion of what to buy.

Market.  The big story of the week is the rapid deterioration in the market.  According to our ETF rankings, the modest decline in the broad averages understates the breadth of the weakness.

Fresh Money.  The weak conditions suggest caution, and we have cut back on position sizes.  Those with new money to invest might look to utilities.

Focus on Utilities

We play the utilities via the iShares Dow Jones U.S. Utilities Sector Index Fund

  This is not very concentrated, with the top five holdings covering only about 30% and the top ten under 50% of the entire investment.  The P/E ratio is about 12.5, but here are the key metrics:

Beta:  .52
Yield:  4/3%.

It shows what the market seeks at this juncture.  Here is the chart.  To those of us who, like Art Cashin, are "cocktail napkin" analysts, this does not seem very exciting.


We own the sector, but it looks to us like there is plenty of work to do around the 70 mark. The model has a weak but positive signal.

Other Commentary

The ETF punditry is paying little attention to utilities.  Tom Lydon has a nice article on the new emphasis on nuclear energy.  He mentions IDU, and a couple of the companies in the group.

We think the main source of recent strength has more to do with a general defensive posture and a renewed emphasis on yield.  The market is showing skepticism about the prospects for near-term capital appreciation.

Weekly TCA-ETF Rankings

With only 11 of our
57 sectors are in the
"buy" range, we have a very weak overall picture.  All of the broad market ETF'S are in the penalty box.

were down over 5% on the week, losing 2.5% to our benchmark, the S&P 500.  While the ratings below show the model signals, we are actually even more conservative, about 50% invested.  (Friday's ratings were even weaker than those listed below).  We always hate to lag the market, of course, but the model has kept us invested for a pretty good overall run.  There were plenty who missed the entire move, calling it a "sucker's rally."  Paying attention to your system is important.

Based upon the model signals, we shifted to a neutral position in the Ticker Sense Blogger Sentiment poll.  This means that there is little we find attractive, but not a strong risk/reward case for going short.


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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