At “A Dash” we discuss a combination of fundamental analysis and system-based trading.  Both are affected by events, but in different ways.

Our fundamental viewpoint, presented in our 2009 Outlook article, is relatively bullish.  Many stocks are priced for a depression.  We believe that economic policies, both those in the pipeline and those on the verge of passage, will have a significant impact.  When the data convince people that there will not be another Great Depression, the DJIA can bounce back to 11,000.  How long will this take?  It depends upon two things:

1. The variable and uncertain lags of economic policy, and
2. The recognition lag and skepticism of investors and traders.

We expect this to play out in a matter of months.  Most investors risk missing the major part of the gains by trying to guess a bottom.  For our new clients we have been deploying assets gradually, looking for good entry points for individual stocks.

Our system-based viewpoint changes with the regular output form our model.  This is a way of looking at individual sectors by considering ETF’s.  Our modeling expert, Vince Castelli, created a combination of Trend, Cycle, and a touch of Anticipation.  This TCA-ETF approach provides a daily forecast for each ETF in our 57- member universe.  Following the changes in this universe helps us look at both the trees and the forest.  Perhaps it can do the same for you.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

The system output shows a dramatic change from last week.  This is a normal response to two weeks of heavy selling pressure.  Only 13 of our 57 ETF’s remain in the “buy” range.  We provide the Thursday output each week; our Friday readings are even more negative.

Reconciling the Two Approaches

Helpful readers often provide the results of their own trading approaches.  Like our TCA-ETF method they are all pretty negative for the short term.  Recognition of the current trend is an established and successful trading approach.

One correspondent asked why we were “leading the sheep to slaughter” in our 2009 Outlook.  His chief reason was that his market indicators suggested more selling to come in the next few weeks.

The resolution is straightforward, a matter of time frames.  Our TCA-ETF method is geared to a one month forecast.  Circumstances change, and change rapidly.

Networking Stocks in the Spotlight

Each week we feature an ETF that has special interest, often making a big move up in our rankings.  For several weeks the sectors have reflected an expectation that the Obama Administration would help certain stocks through the expected stimulus package.  At our sister site, ElectionStocks.com we have a strong body of information on the transition initiatives, including the networking sector.  This is part of the broadband initiative.

Our networking ETF is the iShares entry, the S&P North American Technology-Multimedia Networking Index Fund (IGN). The fund has a P/E ratio of 21.4 and a beta over 1.5.  This is a trading vehicle, unless one has strong, long-term conclusions about the stocks.  The big networking names are included:  Research in Motion (RIMM), Qualcomm, Inc. (QCOM), Cisco Systems, Inc. (CSCO), Corning, Inc. (GLW), and Motorola, Inc. (MOT).  These five holdings make up about 40% of the fund.

It is an aggressive choice in a difficult time.  Here is a look at the chart:

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, January 15th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. It was another tough week for the market, and we were about even against our benchmark S&P 500.  Our methods work best when catching big down moves, or in sustained rallies.

Based upon the current ratings, we moved to a neutral stance in the Ticker Sense Blogger Sentiment poll. Only thirteen of our fifty-seven sectors are in the “buy” range.

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.

Last 5 posts by Jeffrey Miller

• A Tough Nut to Crack - October 29th, 2009
• ETF Update: Looking to the Internet - October 25th, 2009
• Healthcare Reform Becoming Less Likely - October 21st, 2009
• ETF Update: Another Look at the Banks - October 18th, 2009
• Identifying Quackery (and Other Mistakes) - October 6th, 2009