Courtesy of Daniel Sckolnik, ETF Periscope
Sentimental Journey to the Southside
“Economics is extremely useful as a form of employment for economists.” ~ John Kenneth Galbraith
Talk about a serious display of bad feelings.
The markets were displaying an admirable sense of resiliency throughout the bulk of the week, shrugging off the sort of news that often spooks investors into bouts of melancholy mood swings.
On Tuesday, Moody’s Investors Service cut Portugal’s credit rating two levels to A1, ramping up concerns that Spain could be next in the process. If this happened just two months ago, the reverberations would have been as strong as a high number on the Richter Scale. Instead, the Dow Jones Industrial Average ended up over 145 points.
On Wednesday, May’s Retail Sales numbers were released, and they were slightly below expectations, with June’s sales down 0.5% on the heels of a 1.1% decline in May. Also on Wednesday, the Fed proceeded with its ritual reading of the minutes, proclaiming in their own inimitable fashion that “the recovery” shall continue, but maybe not on the pace they had hoped for. Both the DJIA and the S&P 500 Index responded with a sad face, manifesting in the form of a hearty round of selling. Still, the Dow managed to scratch out a win at the end of the day, though the S&P 500 ended off slightly.
By midweek, mostly positive Q2 earnings reports had already come in, including Alcoa (AA), Intel (INTC) and AMD (AMD). However, the bar for earnings may have been set artificially low, considering the fact that the numbers were really only considered good in comparison to the really bad numbers seen over the last year. Could it be that all the hoopla around the expected higher earnings had already been effectively factored into the markets?
On Thursday, the release of pre-market data on Jobless Claims and the Producer Price Index seemed to be at about levels of expectation, but the Industrial Production fell 0.4 % in June, after a 1.0% jump in May. The reaction was fast and clear, if not completely rational. The Dow started the day by taking a fast-paced jaunt to the downside to the tune of a triple digit drop, then spent the bulk of the day floundering around, until a late-hour rally powered the market very close to its breakeven point for the day.
Then, came Friday, and the Southside journey was joined in full, with the Reuters/University of Michigan’s Consumer Sentiment Report offering the lowest reading in 11 months. The key finding of the survey? “Income and job prospects were extraordinarily weak and those bleak prospects have made consumers much more cautious spenders.”
This time there was no resilience in evidence. The Dow ended down 261 points. The S&P 500 sank over 2.9%. Google (Goog), which announced earnings after Thursday’s close, dove into the red 7% deep, apparently disappointing its investors. Gold tanked big-time as well and, for the one day at least, demonstrated a high degree of correlation to the equity markets.
If the Consumer Sentiment Report is a strong indication, it very much sounds like the consumer is singing the blues, and Wall Street seemed to dance to the tune, at least for the day.
Next week comes another wave of earnings, including the alpha dog, Apple (APPL), on Tuesday. Expectations are high, as always, but what if they miss? What if an off-note makes them sing a moody tune? Will the markets, as a group, want to join in on that chorus, maybe having waited impatiently for a cue? Or will a big hit down be seen as a ripe buying opportunity?
Stay tuned, and don’t touch that dial.
What the Periscope Sees
All of last week’s selections performed along the lines of the markets in general, meaning that they ended up pretty much where they began. As Sabrient’s SectorCast-ETF Rankings are forward-looking, and the ETFs below have mainly kept the same positions in the Rankings from the previous week, I am sticking to the same selections to see how they play out over the next few days.
The two bullish selections are again joined with two bearish choices, in the ongoing effort to hedge off some of the market’s current level of volatility. Chart updates are provided below.
IYW (iShares Dow Jones U.S. Technology Sector Index Fund) remains within the top twenty-five ETFs of Sabrient’s SectorCast-ETF Rankings. This index measures the performance of the technology sector of the U.S. equity market.
Chart-wise, IYW successfully broke above both its 50-day and 200-day moving averages, though finally ending below both of them on Friday. The ETF ended up slightly on the week, however.
A bit further down the Rankings, yet till within SectorCast’s 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.
IYE’s daily chart shows this energy ETF briefly flirted with its 50-day MA before retreating back below it. It still may break through when the next surge in the DJIA occurs, or it may prove to become a substantial point of resistance.
To address the short side of the equation, a pair of ETFs emerged last week and, as mentioned, retain their level of attractiveness in the role of hedging the markets against a downturn.
Still comfortably ensconced far down in the bottom is RWR (SPDR Dow Jones REIT ETF), ranked number 320 out of the 345 ETFs that comprise Sabrient’s SectorCast-ETF Rankings. It’s an exchange-traded fund that tracks the Dow Jones U.S. Select REIT Index (Ticker: DWRTFT). The fund, before expenses, seeks to match the returns and characteristics of that Index.
A second ETF that indicates a likely dip according to the Rankings is IYZ (iShares Dow Jones U.S. Telecommunications 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 the telecommunications sector of the U.S. equity market, as represented by the Dow Jones U.S. Select Telecommunications Index.
As before, I am using both IYZ and RWR to handle the possibility of emerging negative trends in the market equation. Toward this end, you might consider acquiring some slightly out-of-the-money put options a few months out, or maybe just decide to short the ETFs themselves. As always, the amount of downside “insurance” you choose to secure should reflect your virtual portfolio’s overall bias, be it upward or downward.
ETF Periscope
The author does not personally hold any of the stocks or ETFs mentioned in this week’s “What the Periscope Sees.”
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.
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.
