ETF Periscope: Contrarian Alert: Sentimental Consumers and a Two-Year High
Mon, Dec 13, 6:55 PM ET, by Daniel Sckolnik, Sabrient.com
Contrarian Alert: Sentimental Consumers and a Two-Year High
by Daniel Sckolnik of ETF Periscope
"A good decision is based on knowledge and not on numbers." ~ Plato
Calling all Contrarians. This might be your moment.
That's right, I'm talking about you. You know who you are. You read the tea leaves of the financial reports, then strive to do the opposite of the consensus. You buy poorly performing assets when others have given up the proverbial ghost on the beast. You swear you can smell the top when everyone else pronounces that the trend is just getting started. You pride yourself on, well, just about anything contrary.
Like I said, this just might be your moment. Why? As the markets unwind toward their 2010 endgame, things are looking pretty copacetic. Check it out:
- Throughout last week, the Dow Jones Industrial Average (DJIA) remained just slightly off its highs for the year.
- The S&P 500 Index (SPX) ended the week at its highest point in over two years.
- The major negative news of the last several weeks, including the European Union sovereign debt crisis redux, tension between the two Koreas, and unexpectedly bad unemployment numbers, has all been absorbed by the markets with aplomb.
- The Commerce Department reported on Friday that the U.S. trade deficit fell to a nine-month low.
- And, as an added bonus, Reuters/University of Michigan's Consumer Sentiment report came in at the highest level in over four months. This report is widely anticipated by investors, and often moves the market on the day it is released. It charts consumer attitudes, which, in turn, serves as a pretty good indicator of where the economy is heading. This is understandable, if you consider that slightly over 67% of the economy is attributable to consumer spending.
Not quite a perfect storm of optimistic elements, but enough signposts along the road to indicate that continuing Bullish opportunities might not be an unreasonable expectation.
However, a closer look at the horizon could just as easily be read to mean that serious storm clouds might be gathering in the sky.
If you look at the brouhaha that is brewing around the tax-cut bill currently circulating in Washington, it would not be an unreasonable assumption that our elected officials will be playing a game of stalemate for the next couple of years, probably at the cost of improving the economy in any significant way. In addition, a growing number of economists are now recognizing the fact that the commonly reported unemployment number, which stands at a scary 9.6%, is in actuality just a sliver of the greater picture. If you factor in the categories classified as "discouraged workers" and the "underemployed," both which are actively seeking, but not finding, full time employment, the number climbs to a truly nasty rate of 17%.
These are not numbers commonly associated with a growing economy.
Another factor to consider is that of the EU. Sure, Ireland, like Greece before it, has begged for and received a massive bailout. And sure, the bailout is officially called something else. But if it walks like a duck, well, "quack-quack." The fact is, the underlying problems revolving around the EU's sovereign debt issue haven't been solved. They have simply been swept from one end of the continent to the other and back again. Whack-a-mole, Euro style. Inevitably, the problems will rear up again, perhaps next in Portugal or maybe Spain. The dyke gets a bit weaker with each patch job though, and when the damn breaks, defensive investors will have a field day, though the field will likely be sopping wet.
So, Contrarians, you may decide to fire off a few investment bullets now, or simply wait and keep your powder dry for the moment you are feeling even more contrary.
What the Periscope Sees
In my search for a clearer read on the markets, I like to use Sabrient's ETF Cast Rankings. It consists of over 300 ETFs (exchange-traded funds) that are ranked and scored via sixteen of Sabrient's proprietary analytics, that, when taken together, offer a forward-looking take on the markets.
Among the analytics that comprise the rankings, I pay particular attention to what Sabrient labels as "Bullscore" and "Bearscore." Bullscore 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 Bullscore, the better it has performed on recent up days in the market. The flipside analytical, Bearscore, indicates the reverse. The higher an ETF’s Bearscore, the better it has performed on recent "down days" in the market. A high Bearscore implies a defensive ETF.
Here are a few ETFs that have popped up on my radar screen. I have put them together as a single play, for the purpose of seeking some upside potential while retaining a defensive hedge simultaneously. Two ETFs that are expected to do well in a Bull market, with an additional two that are expected to be weak in a Bear market. Taken together, they form a reasonably good Long-Short pairing.
In the top 10% of the Bullscore Rankings is RKH (Regional Bank HOLDRS Trust), an equity exchange-traded fund launched and managed by Merrill Lynch. The trust holds shares of common stock issued by specified companies that, when initially selected, were involved in the regional banking industry. There are currently 19 companies included in the Regional Bank HOLDRS Trust.
Also in the top 10% of the Bullscore Rankings is IYG (iShares Dow Jones U.S. Financial Services 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. financial services stocks as represented by the Dow Jones U.S. Financial Services Index. The fund's major holdings include Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, U.S. Bancorp, American Express, Bank of New York Mellon Corp, VISA, and PNC Financial Services Group.
On the flip side, among the bottom 10% of the Bearscore Rankings is XLU (Utilities Select Sector SPDR Fund), an exchange-traded fund launched and managed by SSgA Funds Management, Inc. The fund typically invests in companies that produce, generate, transmit or distribute electricity or natural gas. The fund benchmarks its performance against the Utilities Select Sector Index.
Finally, also among the bottom 10% of the Bearscore Rankings is TTH (Telecom HOLDRS), an equity exchange-traded fund launched and managed by Merrill Lynch. The investment offers diversification in the Telecommunications Industry through a single, exchange-listed instrument. Telecom HOLDRS are Depositary Receipts which represent an undivided beneficial ownership in the common stock of a group of 20 specified companies that are involved in various segments of the Telecommunications Industry.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week's "What the Periscope Sees."
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: "Bear market" Definition
SDI Glossary: "Bullish" Definition
SDI Glossary: "Bull market" Definition
SDI Glossary: "Call" Definition
SDI Glossary: "price" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "Industry" Definition
SDI Glossary: "iShares" Definition
SDI Glossary: "Sector" Definition
SDI Glossary: "Short" Definition
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