ETF Update: The Appeal of Metals and Mining

I have a strong and interesting sector to write about this week.  That usually makes my job easy, but this week there is a problem.

Because of the tragedy in West Virginia, the worst mine disaster since 1972, we are all acutely aware of the real costs of mining.  The company involved represents about 3.5% of the ETF in our spotlight this week.  Many of the other companies have operations that do not involve the same mining approach, risks, or safety issues.

I am not going to sit in judgment on this.  I am just going to report.  Since the ETF update is intended as news information — a part of your own review — you can use the information as you see fit.  Those who choose to avoid the sector, just as others eschew tobacco, alcohol or defense stocks, should feel free to act in accordance with principle.

With that in mind, let us turn to this week's sector spotlight.  For the first time, I am also including a specific stock bonus.

Spotlight on Metals and Mining

We trade the general mining group via the SPDR S&P Metals and Mining ETF (XME).  The ETF has 27 holdings with a roughly equal weighting of 3.5 – 4.5%.  The P/E is nearly 30 on a backward basis and nearly 20 looking forward.  The price-to-cash flow is under 11.  The yield is under 1%.

Short-term traders (like us) are playing on the basis of technical analysis, while longer-term investors must expect a big move in the underlying metals.

Here is the chart:

XME April 10

We have two distinctly different approaches to sector rotation.  For ease of reference, we call them Oscar and Felix.  (This article provides an explanation of the basic difference in approach.  Readers who wish to learn more can write to us at etf at newarc dot com for more detail and an explanation of our approach. )

Felix really likes this chart, while Oscar's rating is lower.  Some readers have asked us to explain the different approaches.  As we see more cases I'll try to do this in coming weeks.  For the moment, let me offer the following points:

  • Felix avoids a lot of risk through extra caution.  The draw downs are much lower.
  • Felix likes a solid, steady gain with significant volume.
  • Felix is slower to get back into a sector, but looks for early signals of potential losses.

Other ETF Experts

Each week I consider what other ETF experts have to say about our
featured sector.  There is an interesting but mixed message this week.

  • Bespoke Investment Group, a favorite source for me (and nearly everyone else) includes XME on a list of overbought ETFs.  My friends at Think B.I.G. know that "overbought" is a tricky concept.  The sectors can sell off, but they can also move much higher.  One of our objectives is to diagnose danger in these charts via the Penalty Box approach.
  • ETF Daily News mentions the sector in the group benefiting from rising commodity prices.
  • Tom Lydon reviews the first quarter winners and includes XME among his picks for Q2.

Weekly TCA-ETF Rankings

We are currently fully invested in ETF programs.  We are happy to report and discuss performance with interested investors.  We also offer a report on how we use the models.  (Write to etf at newarc dot com).  Our actually trading is a combination of both models and some weekly timing.

For the moment we are publishing the ratings list as of Thursday's close in our weekend update, a one-day delay.  We are not recommending these sectors, since investor needs and risk tolerance varies.  We hope everyone finds the ratings to be a useful supplement to their own work.

Here are the current rankings for both Oscar and Felix.

Felix 0400910

Oscar 040910

Bonus Coverage

Vince did some interesting testing.  He checked out his findings using groups of stocks and time periods totally unrelated to the development of the model.  This is a very professional approach — and a very unusual one.

He tells me that we can expect Felix to provide excellent ratings for individual stocks — not just sectors.  We have decided to share the top pick in the Dow and the top pick in the NASDAQ 100.  These are three-week forecasts.  For the moment I am not going to do any further analysis.

DJIA:  Boeing (BA).  Nearly all stocks are in the PB.

NASDAQ 100:  Garmin (GRMN).  Most of the 100 are in the PB.  GRMN is rated 104.

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