“Certainly there are things in life that money can’t buy, but it’s very funny – Did you ever try buying them without money?” ~ Ogden Nash

In a continuation of the trend that began to assert itself two weeks ago, the markets have dived down deep into turbulent waters, with both the S&P 500 Index and the Dow Jones Industrial Average taking five losses in five sessions. In the course of the last two days, both of these benchmark indexes have probed low points not touched since last October, pulling back, however, towards their respective sessions’ end. Friday’s probing went even deeper than Thursday’s, indicating, perhaps, a ride that has not been completed.

Technically speaking, the chart of the DJIA could soon be flashing a bright warning sign. The 50-day moving average is on the verge of crossing below the Dow’s 200-day MA, typically regarded as a strong bearish indicator. The S&P 500 Index, meanwhile, has been below the 1040 mark for the last three days, a number that has had quite a few eyeballs zoned in on it. Taken together, these events can create a lot of noise, whether it’s due to the fact they become a self-fulfilling prophecy or rather because they are indicators that have proven their merit.

So, will the testing of the depths of the waters continue, going deeper down into the Sea of Bears? Or is it all a function of the cyclical unwinding of the vast virtual portfolios that occur as hedge fund players and institutional bankers take a holiday of fun in the sun?

Of course, that is an exaggeration, as there are many more reasons for the deep hit the markets have taken recently. Among the not-so-good news that impacted the market this week was the June ISM Manufacturing Numbers that fell 3.5% from May, which can be taken as a sign that confidence in the economy has begun, once again, to seriously droop. On Friday, the employment report showed that while the jobless rate edged down to 9.5% in June from 9.7% compared to May, nonfarm payrolls fell by 125,000. The most notable bottom line? Only a skimpy 83,000 private-sector jobs had been added. Ouch.

Concerns about China’s ability to maintain its economic growth gave pause to the Bulls as well, as indications that its apparent insatiable desire for commodities might finally be reaching a plateau. For example, customs data shows that imports of coal and iron ore, of which China is the world’s biggest user, fell for the second consecutive month.

Commodities also didn’t seem to take kindly to the week’s rash of economic news. Crude oil fell 8.5% to the lowest levels it’s seen in over a month. Gold took a break from its exalted ascent, stumbling 4% for the week.

Momentum, in general, does not seem to be on the upside. In any event, the next week bears close scrutiny.

Pun fully intended.

What the Periscope Sees

ETF Periscope once again takes the plunge into the cold waters off the deep end. Coming up to the surface for air, we scope out the horizon through choppy waters and espy a few ETFs of interest that just might be worth paying attention to.

Residing within the top twenty-five ETFs of Sabrient’s SectorCast-ETF Rankings is IYW ( IShares Dow Jones U.S. Technology Sector Index Fund). This index measures the performance of the technology sector of the U.S. equity market.

Chart-wise, IYW sits well below both its 50-day and 200-day moving averages. However, it is hovering above the $50 price point, which has proven to be a strong support level in the past. The next week or two shall indicate if the level remains valid in that capacity.

Further down the Rankings, within the top 15% is IYE (iShares Dow Jones U.S. Energy Sector Index Fund), a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. energy stocks as represented by the Dow Jones U.S. Oil & Gas Index. The Fund has major virtual portfolio holdings in diversified oil companies, such as Exxon Mobil Corp., and Chevron Corp.

Looking at IYE’s daily chart, we see that, two weeks back, it has bumped up against its 200-day MA and since then has taken a deep dive downwards of almost 15%. It is presently testing a level that has served in the past as both resistance and, in more recent months, support. It will bear watching to see which role this level assumes.

Way down at the lowly rank of 320 (out of 345 ETFs that comprise Sabrient’s SectorCast-ETF Rankings) is RWR (SPDR Dow Jones REIT ETF), an exchange-traded fund that tracks the Dow Jones U.S. Select REIT Index. The fund, before expenses, seeks to match the returns and characteristics of that Index.

I am using RWR to handle the short side of the equation. Toward this end, you could purchase slightly out-of-the-money put options a few months out, or short the ETF itself. As always, the amount of down-side “insurance” you choose to secure should reflect your virtual portfolio’s overall bias, be it Bullish, Bearish or “Neutralish.”

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 virtual 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 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.