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Read This Before You Trade Your Next ETF…

Posted: August 28th, 2010 | Author: admin | Filed under: Uncategorized | No Comments »
Whether it’s soaring or slumping — and it often does both during the course of a week — the financial sector never falls far from investors’ radar.

That’s not news, of course. But what you might not know is that there are many ways to trade this sector, none of which involves buying or selling a single stock but, rather, making a single play on the industry as a whole.

How can you make one trade that gives you exposure (whether long or short) to banks, brokerages, insurance companies and other types of asset-management outfits? By adding Exchange-Traded Funds (ETFs) and ETF options to your investment arsenal, you only pay one commission (because you’re only buying/selling one position) to be exposed to the upside (or downside) of its various component stocks.

Know Your ETF Holdings

ETFs (and their options) have exploded in popularity in recent years.  They offer securities that trade like stocks but are micro-focused in almost every sector in the markets (including international, commodity, short, ultra-short, etc.).

But there can be a great difference in the holdings, diversification and trade strategy of ETFs, even within one particular sector.

Let’s take a closer look at some of the various financial-sector ETFs “out there” so that you can see some of the many choices you have when you’re ready to add sector plays to your portfolio.

Among the group of financial ETFs are:

  • iShares S&P Global Financials (IXG)
  • iShares Dow Jones U.S. Financial (IYF)
  • iShares Dow Jones U.S. Financial Services (IYG)
  • Financial Select Sector SPDR (XLF)
  • Vanguard Financials (VFH)
  • Rydex S&P Equal Weight Financials (RYF)
  • PowerShares FTSE Rafi Financials (PRFF)
  • First Trust Financials AlphaDEX (FXO)
  • PowerShares Dynamic Financials (PFI)

This list does not even include international, bank, insurance, preferred and other types of financial-related ETFs like the short and ultra-short ones that aim to give you even-greater leverage on smaller moves.

With so many choices, which one represents the smartest way to play the sector at any given time?

Weigh(t)ing Your Options

Not all ETFs are created equal, and that’s a good thing. The more choices we have, the more control we have over the performance of our portfolio.

Remember, the biggest benefit of trading ETFs and/or their options is that, instead of spreading your capital among several individual trades, you can bet on (or against) an industry with just one investment. That said, your responsibility is to learn exactly which underlying stocks make up each individual ETF.

And, to take it one step further, you should know just how the stocks are “weighted” within each ETF. That is, if 10 stocks are included one ETF, you probably won’t see each of them “weighing” an equal 10% of the overall ETF but, rather, some stocks will represent a bigger percentage than others.

Let’s examine the diversification and top holdings of the above-mentioned ETFs. (All data from Yahoo! Finance.)

IXG — Top 10 Holdings are 24.44% of assets.
Top 3 Holdings:
JPMorgan Chase (JPM) — 3.66%
HSBC Holdings (HBC) — 4.05%
Wells Fargo (WFC) — 3.36%

IYF — Top 10 Holdings are 37.91% of assets.
Top 3 Holdings:
JPM — 7.9%
BAC — 7.76%
WFC — 6.92%

IYG — Top 10 Holdings are 57.68% of assets.
Top 3 Holdings:
JPM — 12.38%
BAC — 12.15%
WFC — 10.67%

XLF — Top 10 Holdings are 51.15% of assets.
Top 3 Holdings:
JPM — 9.87%
BAC — 9.47
WFC — 8.76%

VFH — Top 10 Holdings are 36.86% of assets.
Top 3 Holdings:
JPM — 8.2%
WFC — 7.26%
BAC — 5.02%

RYF — Top 10 Holdings are 17.01% of assets.
Top 3 Holdings:
SLM Corp. (SLM) — 2.15%
Morgan Stanley (MS) — 1.92%
Federated Investors (FII) — 1.78%

PRFF — Top 10 Holdings are 48.19% of assets.
Top 3 Holdings:
JPM — 11.15%
WFC — 8.59%
Berkshire Hathaway (BRK/B) — 6.34%

FXO — Top 10 Holdings are 14.51% of assets.
Top 3 Holdings:
W.R. Berkley (WRB) — 1.85%
Allied World Assurance Holdings (AWH) — 1.6%
PartnerRe Ltd. (PRE) — 1.47%

PFI — Top 10 Holdings are 25.73% of assets.
Top 3 Holdings:
Ameriprise Financial (AMP) — 3.12%
MetLife (MET) — 2.85%
Unum Group (UNM) — 2.71%

Now, all ETFs have different rules regarding re-balancing of holdings, discretion of holdings, focus, etc. — and some are more-liquid than others, both in stock and option volume.

Recent massive market capitalization changes in individual stocks have certainly made an impact of the relative weightings of holdings in this sector, as well.

But certainly, the active investor would be wise to know what they are buying when they invest or trade in one of these ETFs or the options on them.  For example, the likes of IYG, XLF, and PRFF have around 50% of their holdings in their top 10 assets — meaning, they are not very diversified.

In addition, on IYG for example, around 25% of the holdings are in JPM and WFC alone (based on the data utilized above). So, the performance of that ETF will be greatly affected by just two securities.

In one way, you could say that is much more risky. But from another perspective, you could view this as getting more “bang for the buck.”

Then there are the very diversified ETFs, some of which attempt to equal-weight — such as RYF and FXO, where the top holdings comprise about 15% of assets and the top holdings are around 2% of assets. In the current market environment, we have seen many sectors move “en masse” quite a bit — more than what is normally the case.  So, these ETFs may also move as a group.

Also remember that supply and demand is a big factor in ETF performance, because they trade as stocks, not on the actual value of their assets.  But as the market settles down into more of a “stock-picking” environment — and if arbitrage-type discrepancies are seen in various ETFs vs. individual stocks, etc (as has been seen recently in preferred vs. common, closed-end funds, etc.) — then you may begin to see more price performance disparity in ETFs based on their holdings and diversification.

The bottom line is that, when you’re gearing up to invest in or trade an ETF or options on an ETF, you should examine the holdings, structure and goals of the ETF to see which one most matches the expectations (short or long term) you have for that sector.

Trade Well,
Andrew Hart

Bear Acceleration Confirms New Trade Signal

Posted: August 25th, 2010 | Author: admin | Filed under: Uncategorized | No Comments »

August will be the third month of losses for the stock market out of the last four when the books close next Tuesday and we move into September. The major US indices have lost more than 5% across the board with the Dow down just 4.25% and the Russell 2K down 10%. The bearish price action looks like it will continue for the majority of September.

As of Wednesday’s close a new, confirmed bear signal has emerged on the markets and it’s historically dependable.  In addition to the slew warning signs from Monday’s Equity Put/Call, the VIX crossing above its 200 day moving average and poor home sales we are seeing a short signal based on Acceleration Bands. Let me explain what this means…

Perhaps one of the most difficult momentum indicators to trigger a buy or sell for the SP500 is Acceleration Bands – the bands target the top/bottom 5% of bull and bear trends helping traders focus on only strongest moves.  Check out our free Indicator How to Video on Acceleration Bands.  The signals are easy – a traditional Acceleration Band Buy Signal occurs after 2 consecutive closes outside the upper band while a Sell Signal occurs after 2 consecutive closes below the lower bands…

Why is this Important NOW?

Wednesday’s close marks the second consecutive close below the lower Acceleration Band meaning a Bearish Acceleration is expected in the market. The previous signals based on acceleration were profitable more often than not.

In the chart below you can see all SPY acceleration signals since 2008. I’ve noted the entry/exit dates and entry/exit prices of each signal—the performance is based on the total signal result and max gain/loss is the max gain in the signal. What’s interesting is that about 75% of signals were profitable at one point during the signal. This means we’ve got a very good opportunity to short the market now.

To give you a better idea of what these signals look like on a chart we plotted the system on the chart below. This shows you the systematic entry/exits. Overall, you can see that these areas are the strongest trends over the past two years—Acceleration Bands seek to highlight the top 5% of moves in a stock or ETF. Of course, the S&P500 (SPY) is an average so there are several sector ETFs experiencing the same signal. Other sector ETFs that are currently in bear accelerations are SPDR Energy (XLE) and SPDR Financials (XLF).

What’s Bottom line for TRADRs? Seasonality suggests that we could see strong selling pressure in September while the mid-term election cycle suggests a one year rally starting after the elections… It would seem likely that a sharp seasonal sell-off could take place in September following by a strong fourth quarter rally.

SP500 Index – Daily – Acceleration Band Signals Since 2008 (click to enlarge)

Trade well,

Andrew Hart – ETFTRADR

Time to Harvest Profits in Agribusiness?

Posted: August 23rd, 2010 | Author: admin | Filed under: Uncategorized | No Comments »

agribusinessAgricultural stocks and commodities have significantly outperformed the market over the past two months and it finally made front page news last week after the HUGE takeover bid for Potash (POT) from BHP Billiton (BHP).  Officially BHP is still chasing its kill and one must ask if this will end up like the failed Rio Tinto takeover circa 2007 that led to investors’ loss of interest.  At any rate, this activity has fueled a monster move in the AgriBusiness (MOO) sector with a 16.8% outperformance of the market since July 1.  The merger activity was sparked by the consensus estimate that agricultural commodities and the sheer price of food will increase at rates higher than expected.

Agriculture commodities are moving higher – the PowerShares Ag Fund is up almost 10% since July, doubling the market’s performance over the same period.  Of course, all things come to an end eventually, but I believe it’s too early to harvest profits.  Every day I use three unique systems to analyze exchange traded funds on three different time frames (I call it the 3X3 strategy) so let’s walk through the current analysis on MOO using some of my TRADR strategies – you’ll find that MOO can still provide good nourishment for your portfolio.

Unlike many traders I’m not afraid to jump on a strong technically ‘overbought’ trend, I’ve found that the strongest trends continue to persist.

Don’t Harvest Profits Yet, Here’s Why

Market Conditions - It’s hard to look at any niche sector of the economy without also looking at the entire market – for example, AgriBusiness is positively correlated to the market so knowing the market trend is imperative.  Don’t worry though it’s not that difficult to objectively time the market, TRADRs use our TrendScore to determine the direction.  Outside of systematic signals traders look at seasonal patterns, like the election cycle or summer slump.

It’s hard to believe, but we’re just two months away from the mid-term election of a first term president, which have historically very bullish.  According to Jefferey Hirsch (Stock Traders’ Almanac) the US stock market (SPY) has not seen a loss in the third year of an election cycle since 1939, period.  What’s the bottom line for you and me?  The fourth quarter is likely to be a great time to buy with respect to the following year.

This is where it gets hard.  The current market is essentially trendless and now leaning to the bear side after last week so it’s hard to catch a falling knife.  So what do you do? Whenever the market is weak smart traders and investors look for the leaders that lead the reversals.  In this market that leader is clear, AgriBusiness (MOO), which has emerged as the leader in the previous week and it’s likely to lead the coming seasonal rally.  Overall, don’t get to anxious to take profits on your agricultural based stocks or ETFs, they are likely to be persistent leaders.

Ag Commodity vs. Ag Stock - OK, let’s step back from the seasonal patterns and take a look at real time data with a real a trading system.  There are a lot of relationships worth following in the market; NASDAQ vs S&P500, Gold Miners vs Gold, Dollar vs or AgriBusiness vs Ag-commodities (which we will focus on today).  These relationships provide an insightful look into future price action, specifically when you look at relative strength.  The chart below says it all.

Relative strength of any relationship can be determined by a simple process, here are the steps to creating an effective timing guide using relationships in the market.

  1. NASDAQ Value / S&P500 Value = X (normalized number of true relative strength of NASDAQ versus SP500)
  2. Plot longer-term moving average and shorter-term moving average of X Value (smoothed MAs expose the true trend of relative strength)
  3. Track Cross & Confirmations of Moving Averages for buy and sell indicators

You can do this with a lot of different pairs out there – for today we are looking at the relative strength of AgriBusiness (MOO) vs. Agri-commodites (DBA).  To get a real perspective of where MOO is going we are looking at the 20 day EMA and 60 day EMA (1 and 3 month moving averages) of the relative strength.  You can see the buy and sell arrows based on the moving average crosses of the relative strength.

As you can see we are entering into another buy area as of this week.  According to this relative strength pattern we’re going to see another few weeks (at least) of AgriBusiness bull activity.
MOO:DBA with 20/60 Day MAs

Multiple Time Frames Agree - We’ve looked at a couple TRADR strategies, however, leveraging multiple time frames is perhaps the most powerful.  I monitor weekly, daily, and hourly charts of 100 top ETFs everyday, here’s a quick look at that analysis on MOO.

Overall, both daily and weekly charts are bullish based on my time-frame unique systems.  Furthermore, on each time frame MOO has shown signs of weakness but NEVER confirmed bearish (areas highlighted with blue box).  This shows how strong the trend has been.

MOO – Daily with Stochastics

MOO – Weekly with %R

Crops may be ripe for the picking and ready to harvest,  but based on my analysis it’s not time to harvest profits on ag stocks.  Based on the current market conditions we are likely to see an average of 10% gain over the year following the mid-term elections, which takes place this November.  The leader of this year’s cycle has already emerged and it’s AgriBusiness so don’t exit too early.  In support of the overall market is MOO itself, based on the relative strength assessment against DBA (ag commodities) we are on the brink of a new bull trend in this niche sector.  And finally, shifting down to the most active trading analysis the daily and weekly charts are showing that bull trends are in place.  Bottom line, even if we’re at a short-term high it’s not worth harvesting your profits on MOO or any other ag-stock yet — all signs point towards additional upside ahead.