ETF Update: Still no Sector Leadership

Last week's big story was the market rebound, a "V" action that has sparked debate over whether the rally can be sustained.

We like to consider sector action over our universe of 57 ETF's as well as looking at the overall market.  A strong market generally has a lot of breadth and also some good leadership.  Our method uses a combination of Trending and Cyclical factors to determine the most promising ETF buys for the next 30 days.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

The Current Market Debate

While some observers spotted the signs predicting last week's rally, most of the pundits remain skeptical.

David Fry at ETF Digest, invoking Santa and the tooth fairy, goes so far as to suggest that the powers that be are pumping up the market.

Nouriel Roubini remains very bearish on the economy and the market, warning that this is a "sucker's rally" before the rush to the financial Titanic's lifeboats.  The analysis at Calculated Risk emphasizes that the only economic improvement has been a slowing in the rate of decline.

Briefly put, most analysts need to see more than a sharp rally from oversold conditions before they are willing to climb aboard.  Based upon long experience, our model takes a similar approach.

Weekly TCA-ETF Rankings

All three of the three inverse ETF's are in the buy zone, and
all other sectors remain in  the penalty
box.  Our weekly program lost back our gains from the prior week, almost as if we had been out of the market altogether for the past three weeks.

We do not share the intense skepticism about current public policy initiatives, and will not therefore be surprised to seem some improvement in conditions.  As we said last week, we expect some losses at turning points, especially when the move is a sharp one.  Our official market posture remains bearish in the Ticker Sense Blogger Sentiment poll.  There are only three of 57 sectors in the "buy" range, and they are all inverse ETF's.

We expect some sectors to move into the buy range this week, leading to some mid-week adjustments.


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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  • Patrick March 16, 2009  

    The near unanimity of pundits calling this a bull trap is about the most bullish thing I have seen in the past 9 months. Not only are they saying to, “not be fooled,” but they are hardly even hedging their language. Never have I seen so many people so convinced that a rally cannot last.
    I have no idea, and neither does anyone else. Even if this rally doesn’t pan out, certainly the rally that does will also be met with widespread derision.

  • Mike C March 16, 2009  

    Just my opinion, but I really wish we could just eliminate the use of the word “pundits”. It seems like a generic term that is just thrown out their by BOTH SIDES as almost a pejorative against the opposing view. Instead of “pundits” saying this or saying that, I think it would be more useful to say who specifically one is referring to and what exactly is disagreed with rather then this meaningless catch all phrase. Who is a pundit? Am I a pundit? Are you Patrick? How about you, Jeff? Is Barry Ritholz a pundit? What about Don Luskin? “Pundits” have a diversity of viewpoints. Frankly, so far the skeptics have generally been on the right side of the trade.
    Patrick, I’m not sure what unanimity you are referring to. I’ve heard more then a few of the serial bottom callers out in force ready to declare last week’s 666 as the bottom just like 740 was the bottom in November, and 850 in October. Frankly, I think this rally might have legs and maybe this the mother of all bear market rallies that many have been expecting (count me in that group), but I don’t think the ultimate low has been put in, but this comment is already getting long so I’ll just say that both valuation and long-term cycle stuff indicates the higher probability is still for lower levels.

  • Patrick March 16, 2009  

    NOUN: 1. A source of opinion
    Nothing insidious meant. A nice catch all vocabulary word that includes anyone with an opinion on the matter. Would you rather people constantly write out: “bloggers, TV personalities, Guests of TV personalities, self proclaimed experts, academics, and other random people given a microphone or editorial space”?
    That would get very tiring.
    Since I read your punditry, I no longer can claim unanimity, and thus, the rally is doomed. It was fun while it lasted.

  • Jeff Miller March 17, 2009  

    Patrick and Mike C — On punditry — I mean it in the way Patrick describes. It is usefule shorthand, and I intend to keep using it.
    Mike C, as usual, has a good point, but he is knocking on the wrong door. As a social scientist, I know all about reification. Any professional social scientist studies this.
    Here is a suggestion for Mike C — Go to the other blogs you read where they say “politicians do this and that” or “academics know nothing practical” and use your argument with them. They are the ones making the big error.
    Since most people have never studied org theory and have no understanding of it, they expect organizations to behave like individuals. It is a simple and incorrect substitution.
    A good grad student question would be to explain why the “Mr. Market” analogy is not a similar blunder.
    To summarize — my use of pundits is a shorthand for the prevailing opinion of commentators –defined as you will. It does not commit the blunder of many others, including some of your favorite sources, where organizational behavior is described using inferences about an individual.
    This is actually an important investor mistake, although it is difficult to explain.
    Thanks guys —

  • personal finance deals March 20, 2009  

    However with the right amount of money even we can be fooled. Pundits answer to ratings, if the numbers don’t like what they’re saying then they get the axe. So why do people insist that pundits and politicians are right? When if you look at it politics is an argument against who’s more wrong.