20
Dec
2010

ETF Periscope: Just in Time for the Holidays, a Little Last Minute Window Dressing

Just in Time for the Holidays, a Little Last Minute Window Dressing

by Daniel Sckolnik of ETF Periscope

“A stockbroker urged me to buy a stock that would triple its value every year. I told him, "At my age, I don't even buy green bananas.” -- Claude Pepper

Have you had your eye on one of those shiny, slightly overbought stocks that have been performing real well the last three or four months?  Have you been hoping to catch the bullish trend, but have been unable to convince yourself that the train hasn’t really left the station? Well, now just might be the perfect time to grab the Bull by the horns and catch a ride, just in time to go along with your mug of eggnog and plate of sugar cookies.

Yes, that’s right. It’s time once again for portfolio managers and mutual fund managers to play that rather quirky, yet predictable game known as “window dressing.”  Window dressing.  That’s when these same managers suddenly realize their portfolios contain quite a few “stinkers,” those picks that have set their intrepid investors back a dollar or ten. Now, these same managers are more than a bit embarrassed by their choices. How embarrassed? A great deal. And their recourse? Well, they can’t change the results of their earlier indiscretions, but they certainly can make themselves look better by ditching these stinkers and dressing up their portfolio with winners. 

Simply put, they sell their losers and buy the most impressive winners out there. This way, what they present to their shareholders and clients in their year-end reports looks so much better, and makes them look so much wiser. Never mind that the bottom line hasn’t really been affected at all. Appearance, while hardly everything, certainly counts for something. Hopefully, at least enough to keep these same clients and shareholders from going elsewhere.

So what has this got to do with you? Well, if there has been a stock or ETF you’ve been following that has proved its mettle over the last quarter of so, and you feel these equities still retain some “oomph,” now might be a good time to buy. After all, if there is a consensus as to who these top performers are, then these same equities may get an extra boost going into the New Year, courtesy of all those fund managers playing  “Dress it up.”  And, while it would be foolish as a pure speculative play, it might just be that little extra reason you need to buy the latest object of your affection and attention. After all, the markets have definitely been trending bullish recently, with the Dow Jones Industrial Average (DJIA) rising close to 500 points during the course of December. The S&P 500 (SPX) has been equally impressive, heading higher by more than 50 points during the same period.

The flip side of this coin probably requires a greater amount of research. What is on the flip? Well, consider the “stinkers” that are being dumped by these same fund managers. If there is a consensus of just who these stinkers are, it is predictable that a sudden, end- of-year exit will bring the price of those equities down a notch or two. Again, this begs the question, what does it have to do with you?

Simple.

If you have had your eye on a stock or ETF, one that seems it has reached a lower number than you feel it warrants, than a sudden dip over the course of the next few days might present a perfect buying opportunity. This could be considered as a good entry point, particularly if the rest of the markets seem to be running contrary. In other words, if the markets in general are up, and your targeted equity is notching down, sans any obvious bad news, then the time to make your move may have come.

After all, one man’s window dressing is another man’s chance to try on that new suit he’s been eyeing in the window all season.

What the Periscope Sees

In my search for a clearer read on the markets, I like to use Sabrient’s

ETF Cast Rankings. It consists of over 300 ETFs (exchange-traded funds) that are ranked and scored via sixteen of Sabrient’s proprietary analytics, that, when taken together, offer a forward-looking take on the markets.

Among the analytics that comprise the rankings, I pay particular attention to what Sabrient labels as “Bullscore” and “Bearscore.”  Bullscore offers a technical measure of how underlying stocks performed on “up days” in the broader market during the last two month's action. The higher an ETF's Bullscore, the better it has performed on recent up days in the market. The flipside analytical, Bearscore, indicates the reverse. The higher an ETF's Bearscore, the better it has performed on recent “down days” in the market.  A high Bearscore implies a defensive ETF.

Here are a few ETFs that I’ve noted during my recent seasonal window-shopping. The first two ETFs, with high Bullscores are expected to do well in a Bull market, and may be considered as ones with upside potential. The third ETF, bearing a low Bearscore, would be expected to react poorly in a Bear market, and is a candidate for a short sell.

In the top 10% of the Bullscore Rankings is XLK (Technology Select Sector SPDR Fund), an exchange-traded fund launched and managed by State Street Global Advisors, Inc. and co-managed by SSgA Funds Management, Inc. The fund invests in the stocks of companies operating in the technology sector; specifically, it invests its corpus in the common stocks of companies that form the Technology Select Sector Index in proportion to their weightings in the index. The fund seeks to replicate the performance of its portfolio against that index.

Also in the top 10% of the Bullscore Rankings is IWF (iShares Russell 1000 Growth Index Fund), an exchange-traded equity index fund launched and managed by Barclays Global Fund Advisors.  The fund invests in stocks of companies listed on the Russell 1000 Growth Index in proportion to their weightings in the index.  The index represents approximately 50% of the total market capitalization of the Russell 1000 Index. The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the large capitalization sector of the U.S. equity market, as represented by the Russell 1000 Growth Index.

On the flip side, among the bottom 10% of the Bearscore Rankings is VNQ (Vanguard REIT ETF), an exchange-traded share class of Vanguard REIT Index Fund. The fund employs a passive management or indexing investment approach designed to track the performance of the MSCI US REIT Index, a benchmark of U.S. property trusts that covers about two-thirds of the value of the entire U.S. REIT market. In seeking to match the index, the advisor does not try to predict or profit from changes in the direction of the REIT market.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.

ETF Periscope
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