ETF Update: Time for Inverse Index Positions?

It was a difficult week for investors, almost regardless of market sector.  As we have observed in our last several updates, a general deterioration in market sectors helps the investor get a good feel for the overall market.  Last week we wondered whether there was anyplace to “hide”.  We noted that the inverse market sectors ETF’s  were showing surprising strength.

Markets versus Sectors

Most ETF investors are interested in finding the best sectors.  The advantage of considering market ETF’s and their inverses — SPY and SH, DIA and DOG, QQQQ and PSQ — is the ability to compare the overall market to individual sector performance.

Sector concentrations have a higher beta — more risk and more reward.  It is unusual for a play on the overall market, long or short, to have more appeal than individual sectors.

Last week’s emergence of the ETF index shorts was quite unusual, suggesting that we should both rank and invest in index ETF’s along side our regular TCA-ETF universe.

This Week’s Featured Sector: IEO

Our featured sector this week, still not matching KOL but worthy of a buy rating is the iShares ETF covering the Dow Jones Oil and Exploration Index (IEO).  The top ten holdings make up about half of the fund and the beta is about 1.5.

Tom Lydon notes that this fund will benefit from any step up in exploration.  In another article, he also writes that the actual payoff might be delayed.

It is an interesting choice, but perhaps not as exciting as we normally expect to see.  We are really poised and looking for a sector rotation.

Weekly TCA-ETF Rankings

Our weekly ratings go from Thursday to Thursday.  The performance gained from some short positions, as the table shows.  There is clearly a benefit from looking at index ETF’s, as we suggested last week.

There will be a turning point, of course.  The TCA approach has a cycle factor for specific sectors, but it is not a “bottom-calling” method.

Here is the chart for the most recent trades and current ratings as of Thursday’s close:


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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One comment

  • VennData June 28, 2008  

    I would like to have the figures on the AP’s (authoritized participants) arbitrage profits on ETFs versus short ETFs, as well as doubles vs the regulars and double shorts etc.
    It would be an interesting hedge fund (and ironically ETF) construct: an investable fund that has AP agreements with ETFs.
    As the off-exchange so-called ‘dark pools’ link up and so much volume goes there, an opportunity for the most efficient operator would exist if the AP world was opened.