Signals remain negative for the overall market in US equities. There is plenty of concern about economic fundamentals and corporate profits.
We look for verification in the message from the market. It is helpful to look at macro measures and also at individual stocks. Sector ETF's reflect an important middle ground. We look at each sector for the (T)rend, for (C)ycles and we add a bit of (A)nticipation. We call this our TCA-ETF model. It can be used to spot emerging trends, or to gain a better perspective on the overall market. (The complete current rankings are at the end of the article, along with an explanation of our methodology).
Two Strong Themes
Our look at the overall picture leads us to continue a bearish market stance. Thursday's employment report did not quite match our negative expectations, but if you looked at the details, it was close. Our sector ratings show little leadership. It is a time to hedge positions, and we are doing so.
Health stocks are a bit different. Let us look at the Nasdaq Biotechnology Index Fund
(IBB). Here is the chart:
We normally do a profile of our featured sector. This week we draw upon ETF expert Don Dion who writes as follows:
IBB tracks the
NASDAQ Biotechnology Index, comprising companies with at
least a $200 million market cap. IBB has 123 holdings and an attractive
0.48% expense ratio. The top industry allocation in the fund is
Medical-Biomedical/Gene, with a 63.29% weighting, followed by
Medical-Generic Drugs and Medical-Drugs, with 11.34% and 9.63%
weightings, respectively. While the fund tends to be top heavy—its
largest component, Amgen (AMGN),
makes up 10.77% of the fund—IBB’s components are spread throughout the
capitalization spectrum. More than 43% of IBB’s holdings can be
classified as either giant or large cap, while 28.5% are medium and
27.75% are small or micro. Overall, the top 10 holdings in the fund are
allocated nearly 52% of the fund’s assets.
Mr. Dion explains our own perspective on ETF choices -- trying to get more diversity while finding the best sectors. We urge readers to check out his entire article -- excellent work.
The general pattern is similar to other health sectors that are positive in our rankings. There is a strong fundamental reason that most do not understand. The entire health sector has been under pressure because of concern about the Obama health initiatives. We have written about this issue, suggesting that the concern was overstated.
The evidence is emerging to support our viewpoint. A major health initiative will not get past the 60-vote cloture threshold in Senate. Despite the party switch by Arlen Spector and the election victory by Al Franken, there are Democrats missing in action due to health reasons. There are also some Democrats who do not buy into the big proposals.
Some have speculated about an end run by the Dems, slipping through a health initiative via the budget reconciliation process. This method would only require a simple majority, but there are limitations about what sort of changes could qualify for this treatment.
Our position is described in detail in this fine article by veteran Washington observer Morton Kondracke. He writes as follows:
If an attempt is made to
pass health reform under "reconciliation" rules -- requiring just a
simple majority vote -- Senate Budget Chairman Kent Conrad, D-N.D.,
told me, the bill would be so pared down, "you'd be left with Swiss
cheese."
Read the entire article to get his full perspective, and check out our Election Stocks site for continuing coverage of the impact of politics on the markets
Weekly TCA-ETF Rankings
Our weekly ratings are from Wednesday, a day earlier than usual because of the holiday. The performance for last week was down about 1.5%, helped by our short positions (via inverse index ETF's). This beat the S&P 500 by about one point.
Based upon the narrow leadership and ratings on the inverse ETF's, we have continued our official bearish position in the the Ticker Sense Blogger Sentiment poll.
Here is the table 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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