ETF Update: When Cash is King

The parade of advisors on financial television has a new and growing club.  These are people  recommending: "You should be in cash, since nothing is working."

What they really mean is: "You should have been in cash, since nothing worked."  Where were they a month or so ago?

In most market climates there are some sectors that perform well.  There's always a bull market somewhere….well, nearly always.

Until the last month declines in some ETF's were matched by dramatic increases in others.  It was sector rotation, but the pace of the moves was accelerating.  Higher energy prices, for example, implied better profits for some sectors but increased costs for others.  When oil prices moved sharply lower and the dollar strengthened, all of the commodity-based ETF''s took a hit.

That was the last "defensive" group.  Our TCA-DTF approach looks not only at Trend but also for Cyclical opportunities.  We also try to Anticipate, thus the system name.  Many managers have called this the most difficult market of their careers.  Our model also struggled for a few weeks before giving the highest rankings to defensive sectors and the index inverse ETF's.  (For new readers, there is a more complete description of our methods at the end of the article.)

We normally feature ETF advice from other experts, but they seem to agree with our model.  There is a general lack of ETF recommendations.  Readers might want to check out the commentary and excellent charts from David Fry, who features some of the inverse ETF's.

Weekly TCA-ETF Rankings

We traded in and out of some holdings.  This was not because of any change in the model ratings, which have had consistently high scores for the inverse ETF's.  As we noted in last week's update, we use these inverse sectors as a hedge.  When we have little long exposure in front of a binary event like the "bailout" legislation, we may choose to lift the hedge.  This time it would have been better to close our eyes and just stay short.

The system adopted a defensive posture three weeks ago, guiding us to a bearish stance in the weekly Ticker Sense blogger sentiment poll.
Prices and ratings reflect 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

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 October 6, 2008  

    Just curious if there is an update on the “Gong model”?
    From a sentiment perspective, it seems like we have excessive fear/bearishness. VIX over 50, multi-year record outflows from stock funds, and calls to go to cash NOW after the market is down 30% YOY.
    From a technical perspective, most indicators seem to register deeply oversold.
    And lastly from a fundamental valuation perspective, I noted (in my regular reading) that a few who might be thrown into the “bearish pundit”/”permabear” camp have now indicated that valuations are reasonable if not cheap after correctly identifying stocks were expensive a year ago.
    It would seem a possibility that numerous factors are lining up to go long at least for a substantial trading rally even if the ultimate bear market bottom has not been reached? Jeff Saut in his recent weekly strategist piece noted that since 1960 roughly 80% of 4th quarters have positive performance.

  • Jeff October 6, 2008  

    Mike – No “gong” signal so far. The methodology is much different from VIX approaches, which have given multiple false signals in this decline.
    I monitor this daily, of course.
    Logic check: stock price changes do not show that someone was “correct” about valuation, as you well know. In an environment where everyone can just pick their own number for forward S&P earnings without any particular methodology, valuation is not very relevant.
    Thanks for the question, and I’ll do further updates on the gong.

  • Mike C October 6, 2008  

    I think the GONG just rung! 🙂
    Bullish investors should turn into shrinking violets as the stock market continues its shocking downward spiral, CNBC’s “Mad Money” host Jim Cramer told Ann Curry on TODAY Monday.
    In what Curry called a “dramatic statement,” Cramer emphatically urged any investor who has money they may need in the next five years tied to stocks to pull their dough out.
    “Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”

  • RB October 7, 2008  

    Value is in the eyes of the beholder it appears — I’ve seen valuation models pegging the S&P at 1200 (Tobin’s q), 1150 (CXO’s Fed model), 1100 (Grantham/qualified Hussman), and 975? (Ritholtz) and Jeff probably places it higher. Extreme outliers are at 750ish (Rosenberg/Sedacca) and analysts (>1300). Only one uses current forward earnings estimates but altogether we arrive at +/- 30% around a fair value neighboring 1050 … which is helpful.

  • Mike C October 7, 2008  

    Do you have a link for the Tobin Q number? I thought it was significantly lower then 1200. Off the top of my head, I think Grantham’s and Hussman’s fair value number is lower then 1100.
    Just my opinion, and this has been discussed at length, but I think any valuation model HAS TO (at least if you want to buy with a margin of safety and not get a quick 12 month 30% haircut) account for the cyclicality of earnings and the business cycle otherwise stocks look cheap based on forward earnings just as the business cycle is peaking and forward estimates are way too high. That is exactly what happened a year ago. The forward estimates had no basis in reality given the deteriorating fundamentals.
    The same thing will happen at the trough on the flipside as stocks might look expensive on forward earnings that are too pessimistic when they might actually be decent values on some sort of normalized long-term earnings.
    The scary thought is if the ultimate bottom is at some 30% below fair value level. I think you would have a generation that would never buy a stock again.

  • RB October 7, 2008  

    Here’s the source:
    It used to be that the q-measure was higher than CAPE, but they seem to have modified the q-numbers.