The quest for performance sometimes drives a rapid shift from one market sector to another.  This can come from major hedge fund reallocations, but also due to marginal changes from large mutual funds.  Our TCA-ETF model shows us the direction of these moves by capturing recent trends.  It also includes some sectors that we expect to return to favor on a cyclical basis.

Even for those not interested in trading based upon a sector program, looking at the changes in ratings paints a picture of overall market interest and activity.  Based upon a reader’s suggestion (Thanks, TT!) we recently added a “prior week” rating to our report.  It is interesting information.

This week we see that the most favored sectors have moved quite rapidly from much lower positions.  This reflects a decline in some recent high rankings, as well as recent strength in some new groups.  (For new readers, there is a further explanation of our approach at the end of the article.)

There are two major highlights:

1. Energy sectors have regained interest.
2. The overall market is much more negative, even more so than suggested by the broad averages.

As we write this, Gustav has (thankfully) lost force before hitting the coast, which will surely result in lower oil prices, and maybe a knee-jerk shift away from during the coming week.
Alternative Energy

One result of the recent spike in oil prices was renewed attention to alternative energy sources.  The political campaign and the Boone Pickens plan have also contributed.  Alternative energy has moved to the top of our rankings, indicating good potential over the next month.

The Global Alternative Energy ETF (GEX) is a good way of investing in this concept.  The fund is based upon the Ardour Global Index.  Van Eck Global describes the index as follows:

AGIXLT is a rules-based, global capitalization-weighted, float adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the alternative energy industry.

The index includes a 2/3 weighting on foreign companies and relatively good diversification.  While the top five companies constitute 43% of the fund the overall concentration falls off rapidly.  It is 46% solar and 26% wind, with a beta of 1.6.

Investor’s Business Daily notes the relationship between oil prices and solar.  While we should probably be taking a long-term view on alternative energy, the excitement grows when there is more fear about oil prices.

Richard Widows at TheStreet.com notes the improved prospect for alternative energy, changing ratings on the sector.

For those interested in options, Adam Warner’s excellent work at the Daily Options Report, one of our featured sites, points out the decline in volatility for First Solar (FSLR).  Adam notes that it is almost like an “employee discount price” for solar energy.  Be sure to check out his chart.

On the negative side, Eric Savitz cites research suggesting that solar module prices are expected to fall.  This would seem to be bad for the companies involved, but it is a bit more complicated.  Lower prices for alternative energy make these sources more competitive with fossil fuels.

These are all good observations.  The question remains:  Will political actors act to improve our long-term energy prospects, or will attention relate to the current price of oil?

Weekly TCA-ETF Rankings

This week’s report of rankings is based upon Thursday’s closing prices, and our Friday trades are not included.  There were some rapid changes in the favored sectors, with a rapid ascent from the various energy ETF’s.

The fraction of sectors in the “penalty box” has continue to move higher, reflecting continuing deterioration in the overall picture.  The index ETF’s for the Dow, the S&P 500 and the NASDAQ, both short and long, are all in the penalty box.

Using the model as our guide, we continued our neutral forecast in the Ticker Sense blogger sentiment poll.

Listed below are the week’s rankings and our trades:

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.