ETF Update: Trading Discipline in a Time of Turmoil

When there is news that seems to be dramatic, it creates a stressful environment for traders and investors alike  Everyone should analyze the fundamentals of the situation, as we did on Friday.

It is also helpful to have a system.  Understanding your own method is the key.  It requires a level of system development and testing where you have real confidence.  Our own method is not geared to turning points in the market, but it reacts pretty quickly to key changes.


In our disciplined system, we study sectors continually, looking at
the charts and ratings for hundreds of ETF's.  Each week we provide a
list of our top-rated sectors for the next three weeks, along with some
of our current observations.  ETF investors can check out the list and
compare our findings with their own conclusions.

In our analysis, we consider Trends, Cycles, and a bit of
Anticipation.  Since we apply the model to nearly 300 ETF's, we call it
the TCA-ETF system.  (For new readers, there is a more complete
description of our methods at the end of the article.  We also have a
free report with more detail on the system and results, available on

The model also provides a nice feel for the overall potential of the
market.  I'll take a look at the macro picture first, and then take a
look at our featured sector of the week.

The Macro View

From an overall market viewpoint, our indicators have improved.  The key elements are as follows:

  • 80% of our ETF's in positive territory ( up from 55% last week).  The median strength rating
    for the overall list is a plus 18 (up significantly  from +1 last week).  
    A score of "0" implies the average long-term ETF expectancy.
  • Only 27% (down from 97%) of our sectors are in the "penalty
    box."  This means that they are currently disqualified from the buy
    list for technical reasons.  You can think of this as a sophisticated
    "stop loss" rule, often applied in advance.  See our article here for a further explanation of this method.  We implemented some faster filters this week, accelerating moves both into and out of the Penalty Box.
  • Our index package is positive.  For this rating we look at the
    ETF's (both long and short)  for the S&P 500, the Dow, and the
    Nasdaq.  You can see these ratings is the results table for this week.

Spotlight on Dubai

It was a week of turmoil. Occasionally breaking news seems
more important than trading fundamentals.  This is especially true in a
holiday week, where thin, half-day trading exaggerates the impact.

Looking at Fundamentals

There are many different ways of interpreting the news
depending upon one's method and time frame.  There were plenty of instant
experts on Dubai.  At Abnormal Returns, the go-to source when you want
viewpoints on a current issues,
you can find the expected
.  These range from those who
foresee a massive sell off to those who view the problem as
"contained."  (Someone needs to find a synonym for that word in
a real hurry!)

Abnormal Returns serves up the best arguments from all
sides, and then it is up to you.  That is fine for a certain audience,
which includes those looking for assurance that their current position is correct. 
Many readers need more, including some interpretation of the conflicting
analysis.  David Merkel wrote a
thoughtful analysis and also included some good links.  His conclusion is

Jim Bianco, writing at The Big Picture, emphasizes the importance
of the timing
of this issue.  His nice
article includes capsule summaries of many mainstream media pieces.

My own Friday piece may be useful for those trying to interpret the news. 
I attempted to highlight the actual analysis and how to interpret the actual
trading by following the dollar.  If you are not really an expert on
Dubai, why pretend?  It is better to evaluate the arguments and issues.

In my own review, I was troubled by several prominent
bearish arguments:

  • The
    market reaction showed the inherent fragility.  In fact, the market
    reaction was little more than normal volatility, especially in thin
  • The
    dollar would have a flight-to-quality, leading to major stock
    selling.  Actually, the dollar spiked at the opening and sold off rather
    quickly.  The dollar lost ground to the Yen, but DXY is still in the
    range from the past week.
  • The
    dollar carry trade is about to unwind, and the market could crash.  I
    am really trying to pin down how the cross-currency carry trade relates to
    US equities.  There is a generalized claim about "printing
    money", borrowing at zero percent, and buying "risk assets"
    which are deemed to include stocks.  I am still looking for the
    specific mechanism for borrowing at zero percent and buying stocks. 
    I invite reader enlightenment on the specifics.  (I
    wrote about the
    , but there are many
    conflicting reasons for that.)
  • Most
    of those advancing these arguments have been looking for such signals for
    many months.  There is a natural "reach" for any evidence.

On the other side, there seem to be many reasons to view
this problem as a matter for lenders and backers, in an amount that is small
compared to their assets.  A solid analysis of other areas that are
real-estate dependent would be most welcome.

Looking to Your System

An important check on one's fundamental analysis comes from
actual trading.  Our TCA-ETF system helps us in this way.

By looking at actual trading — not just the immediate
reaction, but data over a few sessions — one can learn the market
verdict.  There is an important lesson:

Even if you are correct in your
fundamental assessment, the market may disagree.

In such cases it may be better to live to fight another
day.  Meanwhile, our method smooths out the trading blips from a day or
two.  It remains bullish, and we will watch to see if the verdict

Weekly TCA-ETF Rankings

We got back into the market this week, and the timing was
not good.  The S&P was about even while we lost some ground (two percent),
especially since foreign markets did not catch up on Friday.  We expect
more accurate marks on our foreign ETF's on Monday.

We provide these ratings as information for readers who may
not trade as frequently as we do.  Those signing up for our free weekly
email update can also get the entire list.

As noted above, the macro market indicators are in the
penalty box, and most other ETF's are in the penalty box.  Based upon the
current model signals, we have moved to a bullish posture in the
Ticker Sense Blogger Sentiment poll.

Here are the top sectors from our expanded universe of 280
ETF's.  The list also includes the values for the broad market ETF's and
their inverses.  While the list is, as usual, from the prior day's close
(Wednesday), the Friday output is not dramatically different.


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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One comment

  • Doctor Stock November 30, 2009  

    Merkel and I share a common point of view… cautious, mixed. I think investors should own only the strongest stocks with revenue increases… not simply EPS growth and small inverse positions.