ETF Periscope: Mirror, Mirror on Wall Street
Sun, Jul 11, 7:36 PM ET, by Daniel Sckolnik, Sabrient.com
Mirror, Mirror on Wall Street
"'But I don’t want to go among mad people,’ said Alice. ‘Oh, you can’t help that,’ said the cat. ‘We’re all mad here.’" ~Lewis Carroll
One version of a well known children's fairytale features a magic mirror that, upon being asked the question "Who's the fairest of them all?" replies with the harsh truth of reality. Such a mirror would be eminently useful at this juncture in time, when the markets are, at best erratic and yes, even a bit more schizophrenic than usual.
So in terms of the markets right now, who, indeed, is the fairest of them all? Would it be the snorting Bovines, who have prodded the major indexes past key points of resistance during the current holiday-shortened week, or the lumbering Grizzlies who pounded the indexes into submission for the bulk of the last several weeks?
Who, indeed, mirror, mirror? Bear or Bull? Or maybe a beast of a more sideways nature?
Putting things in perspective is a task worth undertaking, especially if the reflection you're seeing seems a bit distorted. So here are a few points of interest along the way that might help to accomplish the task.
The benchmark Dow Jones Industrial Index closed out on Friday at 10,916, putting it squarely at the midpoint between last October's flirtation with Dow 9,500 and late April's brief fling above 11,250. Even when taking into account May's steep correction, and, to a lesser extant, the recent downturn in June, it would not be unfair to say that the market has, in fact, been traveling in a sideways range for the last ten months. This, in spite of such nasty turns of events such as the Europe's financial crisis, continuing bad unemployment numbers, and BP's Deepwater Horizon debacle.
Can it be that the trillion-dollar action taken by the International Monetary Fund and the European Union to prop up the flailing Euro has effectively taken root? Has broad promises of financial regulation by the US government served the dual purpose of placating Main Street while still giving Wall Street the room to breathe it demands? Will merry old England survive the near demise of one of its hallowed institutions, venerable British Petroleum?
Or might it be more the case that the markets are like a punch-drunk fighter, still standing, though somewhat on the dazed side? And, like that fighter, on the verge of toppling to the canvass? Is it possible that the various and sundry props that have been engaged to steady the financial markets may not be of a sturdy enough nature?
Current market sentiment, as gauged by the VIX, often referred to as the "fear index," is hovering around 25, a number that may be regarded neither as excessively high nor low. This could be seen as another indication of relative calm. But is it the calm before the storm, or the calm of smooth sailing waters?
Summer, the World Cup, and the relative dearth of truly bad news have, for the moment, brought a certain degree of equilibrium to the markets. But they remain intrinsically skittish, ready to turn on a dime.
Next week should give a better read on the state of the economy, with Q2 earnings about to be unveiled. As usual, Alcoa (AA) kicks off the season on Monday, followed later in the week by Google (GOOG), Bank of America (BAC), and General Electric (GE), among other heavy hitters. Pairing these announcements with the slew of economic reports due next week including Retail Sales, Industrial Production and Consumer Price Index, should go quite far in helping decipher the underlying market sentiment.
And it should give a better glimpse at the long-term nature of the beast that preens in front of the mirror.
What the Periscope Sees
ETF Periscope stares into the mirror on the wall and wonders which funds are, indeed, the fairest of them all. Or, at the very least, which are worth a closer look. Here are a few that are currently being observed.
Two bullish selections from the previous week retain the same glowing reflection that made them seem so attractive at that point in time. To balance off the equation, a new ETF is being introduced into the short mix to compliment last week's choice. Chart updates are provided below.
IYW (iShares Dow Jones U.S. Technology Sector Index Fund) remains within the top 25 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 remains below both its 50-day and 200-day moving averages, though it seems to have found recent support at the $50 price point. IYW's next critical level will likely be the junction of both moving averages that can potentially become its next strong point of resistance.
Traveling further down the Rankings, yet remaining 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 portfolio holdings in diversified oil companies, such as Exxon Mobil Corp., and Chevron Corp.
Looking at IYE's daily chart, we see that it has found support at the $29 price point, though it remains below both the 50-day MA and 200-day MA. A bullish bump in the market, however, could propel it back thru and above its 50謀ay MA.
What about the short side of the equation?
Far down the rankings and situated close to 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 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 dwells close to the bottom of the rankings, and one that I'm adding to the mix for short-side consideration, 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.
I am using both IYZ and RWR to handle the possibility of emerging negative trends in the market equation. Toward this end, you could purchase slightly out-of-the-money put options a few months out, or short the ETFs themselves. As always, the amount of downside "insurance" you choose to secure should reflect your portfolio's overall bias, be it Bullish, Bearish or "Neutralish."
See you on the flip side of the mirror.
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 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 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.
SDI Glossary: "Bearish" Definition
SDI Glossary: "Bullish" Definition
SDI Glossary: "price" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "iShares" Definition
SDI Glossary: "Sector" Definition
SDI Glossary: "VIX" Definition
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