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Courtesy of Daniel Sckolnik, ETF Periscope
A Lot of Sideways Gets You Nowhere, And Fast!
“Whenever you find yourself on the side of the majority, it is time to pause and reflect.” ~Mark Twain
Lots of noise, but not a whole lot of light.
That might be the theme that emerges from the market action this week, with both the Dow Jones Industrial Average and the S&P 500 Index ending up pretty much where they started out.
The noise aspect of the equation came from a variety of sources, including earnings announcements, economic reports and pundit’s pronouncements on the impending burst of the gold bubble.
The Conference Board reported on Tuesday that consumer confidence fell again in July, which followed June’s steep fall-off. The usual suspects were stated as the cause, with concerns focused on jobs and general business conditions. The bottom line? The index now sits at 50.4, which is the lowest level since February. In other words, the masses seem to be acknowledging that the recovery can use a recovery.
As if any confirmation of this was needed, the midweek report on U.S. durable-goods orders revealed that demand was down by 1.0% for June. This was, apparently, a surprise to the ranks of economists that had indicated that they were expecting a solid gain for the month. Woops. Back to school, economists!
Market watchers cast an expectant eye to the release of Friday’s GDP numbers. Again, disappointment was to be found, as real gross domestic product, that is, the inflation-adjusted, seasonally adjusted value of all goods and services produced in the U.S., rose a mere 2.4%, a substantial dip below an average 4.4% increase over the last six months.
Second Quarter earnings were mixed, and responses were erratic. Exxon Mobile Corp. (XOM) announced higher net income for the quarter, but shares ended down for the day anyway. Merck (MRK) reported earnings off over 50%, and the stock lost close to 2% on the news. Wynn (WYNN) announced that it doubled its profits, but that wasn’t enough, apparently, to impress investors. Its stock took a hit as well. It may be asked, at this point, if all the good news has been factored into prices in general this earnings season. And is bad news of an unexpected nature costing more than might be expected?
The sideways actions of the markets this week can be seen as a microcosm of the actions of the entire year to date. For example, the DJIA is absurdly close to where it was when the first trading day of the year began. The Dow sat at 10,583. Now, it is at 10,465. A bit over 100 points over seven full months. But wait, there’s more! It is pretty much at the midpoint for the year as well, between April’s high of 11,250 and July’s low of 9,700. A lot of traveling to arrive at the same place.
What about the S&P500? Pretty much the same story, only more so. The S&P 500 began the year at 1,116. Now, it’s at 1,101. High point of the year? April’s 1,220. Low? July’s 1,020. Midpoint? 1,120. Pretty close to where we are now.
So what does this all mean? What I would say is that paying close attention to the market action around the 1,100 level of the S&P 500 might be of value. It’s sure looking like a line in the sand of late, and may serve as a useful reference point once a clear picture emerges. Will we be looking up or down at it?
For me, it wouldn’t be much of a surprise if the bulk of the summer were spent watching the river run sideways.
What the Periscope Sees
Reflective of the overall week in general, all four of last week’s ETF selections ended up pretty close to where they started. As Sabrient’s SectorCast-ETF Rankings are forward-looking by about 4-6 weeks, I’m sticking with these same ETFs for now. Updated chart observations are included below.
Remaining within the top 5% of the Rankings sits KBE (SPDR KBW Bank ETF), an exchange-traded fund launched by State Street Global Advisors. The fund invests in stocks of companies operating in the Banking Industry, including national money center banks and regional banking institutions. The fund replicates the KBW Bank Index.
Reading the charts, KBE has spent most of the week above its 200-day moving average, though it did dip below that slightly on Friday, before achieving the necessary altitude to edge back on top. It also remains above the 50-day MA, so the potential for a strong base of support has now emerged.
Also within the top 10% of the listings, we find XOP (SPDR S&P Oil & Gas Exploration & Production ETF), an exchange-traded fund that invests in stocks of companies operating in the oil and gas exploration & production segment of a U.S. total market composite index. The fund, before expenses, seeks to replicate as closely as possible the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Similar to last week, XOP ended just on the underside of its 50-day MA. However, its 200-day MA was pierced on two occasions this past week, although it couldn’t quite hold onto that lofty position. A day of good news on the energy front just might propel XOP’s price through that barrier for a longer stretch.
For the short side of the equation, two selections that follow are worth consideration:
Still deep at the bottom 15% of the Rankings is XLB (SPDR S&P Materials Select Sector SPDR Fund). It tracks the Material Select Sector Index, which includes companies from the following industries: chemicals; metals & mining; paper & forest products; containers & packaging; and construction materials.
Going even further down the list to the bottom of the barrel, we spot FXG (First Trust Consumer Staples AlphaDEX Fund), an exchange-traded fund launched and managed by First Trust Virtual Portfolios L.P. The fund replicates the StrataQuant Consumer Staples Index by investing in stocks of companies listed in that Index in proportion to their weighting in the Index.
As I have previously done, I am using both XLB and FXG to handle the short side of the market equation. You might acquire some slightly out-of-the-money put options a few months out, or you might decide to short the ETFs themselves. Exactly how much downside “insurance” you choose to secure is a question for you to decide, reflecting your overall market bias as well as your risk-management strategies.
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.
