28
Jun
2010

ETF Periscope: World Cup Meets Wall Street

Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.”  ~ Sun Tzu

It is not uncommon to hear that nothing quite compares with the mad frenzy that is World Cup soccer. Nothing, perhaps, except for Wall Street, where degrees of both frenzy and madness can be as common as yellow cards dished out in the course of a fever-pitch match.

A slew of mixed financial news poured out this week, with a bias towards the negative side. In response, the Dow Jones Industrial Average retreated to the downside, ending at 10,143 and a loss of slightly over 300 points. Though the Dow began the week by ramming a header towards its 50-day moving average, it proved to be no more than a head-fake. The DJIA ended crashing below its 200-day MA, a point that can offer stiff resistance once breached.

In advance of next week’s G-20 summit meeting, China announced that it would allow greater flexibility in its currency exchange rates. The markets’ Monday morning cheers lasted briefly, until it seemed to realize that the reform offered was little more than a bone tossed in response to the Obama administration’s clarion calls to address the huge trade imbalance between the two countries.

British Petroleum’s woes continued throughout the week, as oil continued to gush from its Deepwater Horizon platform into the Gulf of Mexico. BP’s perceived liability issues easily trumped its sizeable assets, as investors knocked down the stock by yet another 10%, taking it down to a 14-year low of $27. The British-based company has now suffered a $100 billion loss since the explosion.

Though there arguably seemed to be a mismatch on the field as the Bears wove downfield, some of the week’s news seemed to prop up the Bulls’ defense.

On Friday, the Banking Sector appeared to like what it heard regarding the latest developments in the financial reform legislation limping its way through Congress. The apparent consensus by Wall Street was that the version of the “Volker Rule” that emerged from back room negotiations would not threaten the status quo significantly. Goldman Sachs (GS), Citicorp (C), JP Morgan (JPM) and Bank of America (BAC) all rose about 3% in response to the proposed new rules.

Also on Friday, the Reuters/University of Michigan consumer sentiment index indicated that consumers were the most optimistic they’ve been in over two years. On the other hand, expectations are that economic growth will proceed on a very slow pace.

So what will the coming week bring to the markets? Perhaps the Bulls and the Bears will catch their collective breath and turn all eyes toward the World Cup, as fans cheer and groan in taverns, homes and, yes, certainly, even trading rooms on Wall Street.

What the Periscope Sees

ETF Periscope glances downfield in search of a scoring opportunity, mindful at the same time to maintain a defenseman’s mindset.

My focus remains on three out of four ETF selections from last week, with the pair of long selections having weathered the downturn reasonably well. Chart notations have been updated as necessary to reflect their current positions.

Within the top ten ETFs of Sabrient’s SectorCast-ETF Rankings is IAI (iShares Dow Jones U.S. Broker-Dealers Index Fund), an exchange-traded fund launched by Barclays Global Investors and managed by Barclays Global Fund Advisors. The fund seeks to invest its corpus in common stocks of companies that form the Dow Jones U.S. Select Investment Services Index as per their weighting in the index and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of that index.

Chart-wise, IAI remains well below both its 50-day and 200-day moving average, and it still has a way to go before it breaks back through. It continues to hover in the middle of a consolidation range, where it remains above its previous support levels established during February’s lows.

Further down the Rankings, within the top 10% is QTEC (First Trust NASDAQ-100 Technology Sector Index Fund ETF), an equity exchange-traded fund launched by First Trust Portfolios L.P. and managed by First Trust Advisors L.P. The fund invests in stocks of companies operating in the Technology Sector and seeks to replicate the NASDAQ-100 Technology Sector Index by investing in stocks of companies listed in this Index in proportion to their weighting in the Index.

Looking at QTEC’s chart we see that it has fallen below its 50-day MA, though it remains just above the 200-day MA, a key indicator.  It also remains well above February’s low point, which since then has served as support.

On the bottom third of Sabrient’s SectorCast-ETF Rankings is IWP (iShares Russell Midcap Growth Index Fund), an exchange-traded equity index fund launched and managed by Barclays Global Fund Advisors. The fund seeks to replicate the performance of Russell Midcap Growth Index by investing in stocks of companies listed on that index in proportion to their weightings in the index.  The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe.

I have found IWP to be a good proxy for the overall markets, and therefore a valid choice for insurance against strong downward moves. For this purpose, you could purchase slightly out-of-the-money put options a few months out, or short the ETF itself. As always, the amount of insurance you secure should reflect your portfolio’s overall bias to the long or short side.

ETF Periscope

The Process

For myself, as always, I look to Sabrient’s SectorCast-ETF Rankings for some effective insight. The Rankings consist of over 340 ETFs (exchange-traded funds) that are ranked and scored via sixteen of Sabrient’s proprietary analytics, that, when taken as a whole, offer a forward-looking take on the markets.

My process in selecting from among the SectorCast-ETF Rankings includes scanning the top 10-15% of the current list, which is updated three times weekly. I’ll limit my choices to one ETF per sector, in an effort to achieve a healthy level of diversification.

Among the analytics that I pay particular attention to is what Sabrient terms “Bull Score” and “Bear Score.”  The Bull Score 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 Bull Score, the better it has performed on recent up days in the market. The flipside analytical, Bear Score, indicates the reverse. The higher an ETF's Bear Score, the better it has performed on recent “down days” in the market.  A high Bear Score implies a “defensive” ETF.

For me, the Bull Score and Bear Score are among the tools that I incorporate into the overall hedging equation. My ultimate goal is to craft a hedged, lower-risk portfolio that protects against the markets inevitable gyrations while continuing to allow for upside potential.

Next, I’ll look at the ETF’s chart, seeking divine inspiration, or, failing that, at least a high level of technical confirmation via support and resistance levels, simple moving averages, etc. Finally, I’ll check to see if the ETF offers options, which I frequently use in place of buying shares in the ETF itself.

In selecting ETFs to cover the short side of my portfolio, I’ll flip the process, scanning the bottom 10-15% of the Rankings and adapting the Bull Score/Bear Score analytic as appropriate.

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.

“Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” ~ Sun Tzu

It is not uncommon to hear that nothing quite compares with the mad frenzy that is World Cup soccer. Nothing, perhaps, except for Wall Street, where degrees of both frenzy and madness can be as common as yellow cards dished out in the course of a fever-pitch match.

A slew of mixed financial news poured out this week, with a bias towards the negative side. In response, the Dow Jones Industrial Average retreated to the downside, ending at 10,143 and a loss of slightly over 300 points. Though the Dow began the week by ramming a header towards its 50-day moving average, it proved to be no more than a head-fake. The DJIA ended crashing below its 200-day MA, a point that can offer stiff resistance once breached.

In advance of next week’s G-20 summit meeting, China announced that it would allow greater flexibility in its currency exchange rates. The markets’ Monday morning cheers lasted briefly, until it seemed to realize that the reform offered was little more than a bone tossed in response to the Obama administration’s clarion calls to address the huge trade imbalance between the two countries.

British Petroleum’s woes continued throughout the week, as oil continued to gush from its Deepwater Horizon platform into the Gulf of Mexico. BP’s perceived liability issues easily trumped its sizeable assets, as investors knocked down the stock by yet another 10%, taking it down to a 14-year low of $27. The British-based company has now suffered a $100 billion loss since the explosion.

Though there arguably seemed to be a mismatch on the field as the Bears wove downfield, some of the week’s news seemed to prop up the Bulls’ defense.

On Friday, the Banking Sector appeared to like what it heard regarding the latest developments in the financial reform legislation limping its way through Congress. The apparent consensus by Wall Street was that the version of the “Volker Rule” that emerged from back room negotiations would not threaten the status quo significantly. Goldman Sachs (GS, Citicorp (C), JP Morgan (JPM) and Bank of America (BAC) all rose about 3% in response to the proposed new rules.

Also on Friday, the Reuters/University of Michigan consumer sentiment index indicated that consumers were the most optimistic they’ve been in over two years. On the other hand, expectations are that economic growth will proceed on a very slow pace.

So what will the coming week bring to the markets? Perhaps the Bulls and the Bears will catch their collective breath and turn all eyes toward the World Cup, as fans cheer and groan in taverns, homes and, yes, certainly, even trading rooms on Wall Street.

What the Periscope Sees

ETF Periscope glances downfield in search of a scoring opportunity, mindful at the same time to maintain a defenseman’s mindset.

My focus remains on three out of four ETF selections from last week, with the pair of long selections having weathered the downturn reasonably well. Chart notations have been updated as necessary to reflect their current positions.

Within the top ten ETFs of Sabrient’s SectorCast-ETF Rankings is IAI (iShares Dow Jones U.S. Broker-Dealers Index Fund), an exchange-traded fund launched by Barclays Global Investors and managed by Barclays Global Fund Advisors. The fund seeks to invest its corpus in common stocks of companies that form the Dow Jones U.S. Select Investment Services Index as per their weighting in the index and seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of that index.

Chart-wise, IAI remains well below both its 50-day and 200-day moving average, and it still has a way to go before it breaks back through. It continues to hover in the middle of a consolidation range, where it remains above its previous support levels established during February’s lows.

Further down the Rankings, within the top 10% is QTEC (First Trust NASDAQ-100 Technology Sector Index Fund ETF), an equity exchange-traded fund launched by First Trust Portfolios L.P. and managed by First Trust Advisors L.P. The fund invests in stocks of companies operating in the Technology Sector and seeks to replicate the NASDAQ-100 Technology Sector Index by investing in stocks of companies listed in this Index in proportion to their weighting in the Index.

Looking at QTEC’s chart we see that it has fallen below its 50-day MA, though it remains just above the 200-day MA, a key indicator. It also remains well above February’s low point, which since then has served as support.

On the bottom third of Sabrient’s SectorCast-ETF Rankings is IWP (iShares Russell Midcap Growth Index Fund), an exchange-traded equity index fund launched and managed by Barclays Global Fund Advisors. The fund seeks to replicate the performance of Russell Midcap Growth Index by investing in stocks of companies listed on that index in proportion to their weightings in the index. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe.

I have found IWP to be a good proxy for the overall markets, and therefore a valid choice for insurance against strong downward moves. For this purpose, you could purchase slightly out-of-the-money put options a few months out, or short the ETF itself. As always, the amount of insurance you secure should reflect your portfolio’s overall bias to the long or short side.

ETF Periscope

The Process

For myself, as always, I look to Sabrient’s SectorCast-ETF Rankings for some effective insight. The Rankings consist of over 340 ETFs (exchange-traded funds) that are ranked and scored via sixteen of Sabrient’s proprietary analytics, that, when taken as a whole, offer a forward-looking take on the markets.

My process in selecting from among the SectorCast-ETF Rankings includes scanning the top 10-15% of the current list, which is updated three times weekly. I’ll limit my choices to one ETF per sector, in an effort to achieve a healthy level of diversification.

Among the analytics that I pay particular attention to is what Sabrient terms “Bull Score” and “Bear Score.” The Bull Score 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 Bull Score, the better it has performed on recent up days in the market. The flipside analytical, Bearscore, indicates the reverse. The higher an ETF's Bear Score, the better it has performed on recent “down days” in the market.  A high Bear Score implies a “defensive” ETF.

For me, the Bull Score and Bear Score are among the tools that I incorporate into the overall hedging equation. My ultimate goal is to craft a hedged, lower-risk portfolio that protects against the markets inevitable gyrations while continuing to allow for upside potential.

Next, I’ll look at the ETF’s chart, seeking divine inspiration, or, failing that, at least a high level of technical confirmation via support and resistance levels, simple moving averages, etc. Finally, I’ll check to see if the ETF offers options, which I frequently use in place of buying shares in the ETF itself.

In selecting ETFs to cover the short side of my portfolio, I’ll flip the process, scanning the bottom 10-15% of the Rankings and adapting the Bull Score/Bear Score analytic as appropriate.

ETF Periscope
daniel / Tag: BAC, BP, C, GS, IAI, IWP, JPM, QTEC /