ETF Update: Systems and Breaking News

In a time of fast-breaking news, a trading system may lag the market.  This is nearly impossible to avoid.  Let us consider the problem more deeply.

Characteristics of Trading Systems

Trading systems are not news-driven.  Everything important is reflected in data that can be objectively measured.  The best systems, like our own TCA-ETF model, have the following characteristics:

  • There are no specific news inputs;
  • The guiding principle is that any relevant information is reflected by the market;
  • Getting the signal to noise ratio right is very important;
  • It is acceptable to miss the exact turning points in the market.

The basic concept is to avoid frequent false starts.  Let the market tell you when there is a big move underway.  Getting on the right side of the big moves is the key to profits.

The Current Experience

Recent market experience is a real challenge for these system principles.  Over the last two weeks our methods identified opportunities that looked great, but did not pan out.  Now the model has turned very negative, just at the time the market is celebrating the Obama announcements.

Does this mean our model is "broken"?  We had a few comments suggesting that these were "bad calls."

We certainly feel it in our pocketbook when a call does not work.  We also understand that most market gurus only advertise their winners, giving a false sense of infallibility.  We are prepared for times like this, since we simulate our methods carefully and know what to expect.

Getting Real

No trading system is going to pick up the violent market moves of recent days.  The intra-day swings of eight percent, the moves of two percent in the last twenty minutes of trading — these are not typical and cannot be modeled.

To trade your system effectively, you have to understand what it can do — and what it cannot.  We are comfortable in our expectation that there is plenty of time to profit.   (For new readers, there is a more complete description of our methods at the end of the article.)

Current ETF Recommendations

The ETF expert universe is aligned with our own ratings:  plenty of fear and emphasis on defensive holdings.

ETF Expert has a reading list with attention to "stashing cash."

ETF Trends is trying to look ahead to a market rebound.

There is also speculation about the ETF implications from President-elect Obama's plans.  (Check out here and here).

At our sister site,, we have been working on the market impact of the election for about eighteen months.  To our surprise (and disappointment) the election was overshadowed by other events.  We think it is a mistake to place too much emphasis on the "Obama stocks" just yet.  We have studied this carefully, and will provide both ETF and stock updates when the time is right.

Weekly TCA-ETF Rankings

As usual, the ratings reflect prices and signals as of Thursday night, November 20th.  As a bonus for readers, we'll note that tonight's ratings still do not show anything in the "buy" range.  Anything other than an inverse ETF is in our "penalty box."  Readers should note that we provide these as market information, not trading advice.  Please read our disclaimers.  If you want to follow the service in real time, please review our free reports on methods and performance.  We use some discretion in our own trading programs, knowing when there are news events that may not be reflected in the model.

Based upon the current ratings, we shifted our position to "bearish" in the  Ticker Sense Blogger Sentiment poll. We did this with full knowledge of Friday's trading, simply reflecting the model signal.


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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  • Mike C November 25, 2008  

    Just curious if you have done any work/research on Kondratieff/Long wave cycles, and have any opinions? If so, might make for an interesting blog post.

  • Jeff Miller November 27, 2008  

    Mike — I have not done any independent research on these cycles, but I certainly am hearing a lot about it these days. It seems to be driving a lot of trading.
    Thanks for the suggestion.