Courtesy of Daniel Sckolnik, ETF Periscope
“The ultimate authority must always rest with the individual’s own reason and critical analysis.” ~ Dali Lama
Last week, British Petroleum’s press coverage got ramped up considerably, supplanting the European Union’s sovereign debt crisis as the focus of the financial press. Euro debt swapped out for oil slicks, in a manner of speaking.
On Wednesday, BP’s stock plunged 16 percent in a single day. At that low point, it had lost an astonishing amount, nearly 50 percent of its market value since late April’s Deepwater Horizon explosion. Tens of billions of dollars in equity were wiped out, and pundits trumpeted how BP’s individual components were likely more valuable than its actual stock price. BP stockholders were looking at the possibility of receiving IOUs rather than dividend checks, or even no dividends at all. By Friday, however, the stock rebounded back to Wednesday’s opening levels. This mirrored, to a certain degree, the gyrations of the Dow Jones Industrial Average, which, during the course of the week, made back the majority of the 300 points it forfeited just last Friday.
“Spill, baby, spill” seemed to have turned to “chill, baby, chill.”
Adding to the current mix of oil and water, the Reuters/University of Michigan consumer sentiment index issued early Friday said confidence grew to its highest level since January 2008, which put it well ahead of forecasts. However, whatever level of euphoria the markets may have experienced from this news, the weak retail sales numbers issued earlier in the day most likely tempered it.
All in all, a bit of calm returned to the rollicking seas, though perhaps with the addition of an oily sheen. And the slick may be growing in more ways than one.
At the moment, an obvious point of attention is the 10,000 level of the DJIA. The Dow has been dancing around this psychologically important level for the last three weeks, and only additional time will tell if the markets are in a medium term consolidation phase or merely catching their collective breath prior to taking a clear direction. Much is likely to be revealed by mid-week, as the trifecta of Housing Starts, Producer Price Index and Industrial Production numbers are announced prior to Wednesday’s market opening.
Cut-and-cap? Relief wells? James Cameron to the rescue? The devil, as always, is in the details. Paying attention to detail right now is hardly a high price to pay, especially when you consider the alternatives in relation to your virtual portfolio.
What the Periscope Sees
So what does the periscope see as it scopes out the murky waters?
Wiping off an oily sheen from the lens, a few ETFs of note stand out. Here are a few candidates worthy of consideration:
Remaining atop Sabrient’s SectorCast-ETF Rankings at the top position 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. However, it appears to remain smack in the middle of a consolidation range, where, it has previously been noted, it remains slightly above the previous levels of support established during February’s lows.
Further down the Rankings, though still comfortably ensconced within the top 5% is QTEC (First Trust NASDAQ-100 Technology Sector Index Fund ETF), an equity exchange-traded fund launched by First Trust Virtual 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, for the last three weeks, it has been riding its 200-day MA extremely closely, and as of Friday, sits slightly atop that key indicator. It remains slightly above levels of support established during February’s low point.
Digging down a bit deeper into the Rankings, though still remaining in the top 15%, is RYJ (The Claymore/Raymond James SB-1 Equity ETF), an exchange-traded fund launched by Claymore Securities, Inc. and managed by Claymore Advisors, LLC. It invests in the public equity markets across the globe, in stocks of companies that operate across diversified sectors and diversified market capitalizations. The fund seeks to replicate the Raymond James SB-1 Equity Index by investing in stocks of companies listed on that index in proportion to their weighting in the index.
RYJ’s chart shows that it sits slightly above its 200-day MA although it is below the 50-day MA. The ETF has shown the same high level of volatility as the broader indexes, as expected considering its make-up.
Choosing from the lower rungs of Sabrient’s SectorCast-ETF Rankings, about two-thirds of the way down is IWP, (iShares Russell Midcap 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 Midcap Growth 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. The fund seeks to replicate the performance of Russell Midcap Growth Index.
I have found that IWP serves as a reasonable proxy for the overall markets, and it remains as a valid choice for the purpose of insurance against a downturn. You can buy 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 virtual portfolio’s overall bias to the long or short side.
Still waters run deep, and, sadly, in the case of the Gulf of Mexico, murky. Not unlike the current markets, which, while offering the promise of a clearer narrative somewhere down the line, maintain a certain level of hazard for the unwary and less cautious amongst us.
ETF Periscope
Full disclosure: The author does not personally hold any of the stocks mentioned in this week’s “Stock Ideas.”
THE PROCESS
One of the tools that I utilize in the course of my assessment process is Sabrient’s SectorCast-ETF Rankings. The Rankings consist of over 340 ETFs (exchange-traded funds) that are ranked and scored via 16 of Sabrient’s proprietary analytics, that, when taken as a whole, offer a forward-looking take on the markets.
My selection process 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 invaluable in considering the overall hedging equation. My ultimate goal is to craft a hedged, lower-risk virtual portfolio that helps to protect against the markets’ inevitable gyrations while continuing to allow for upside potential.
Next, I’ll look at the ETF’s chart for a degree of technical confirmation. I’ll use support and resistance levels, simple moving averages and a handful of other indicators to help evaluate the market. 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 virtual 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.
