17
Jan
2011

ETF Periscope: DOW 12,000: Floating a Trial Balloon or Bursting a Bubble?

DOW 12,000: Floating a Trial Balloon or Bursting a Bubble?

by Daniel Sckolnik of ETF Periscope

“I didn't end up going bankrupt . . . I made some great investments and I held on to my money, which also enables me to have the freedom to do what I want now. But it's not about finances. No matter what, it's about keeping it real.” -- Vanilla Ice

Off in the not-so-far distance and within sight of the horizon, the round, juicy number 12,000 looms. 12,000, as in Dow Jones Industrial Average (DJIA) 12,000.

The Dow 12,000 served as support in 2007 and again in 2008.  That is, until June of that year when the bursting of the credit/housing bubble started to take down the markets in a serious manner. Now, two and a half years later, that same number seems tantalizingly close, and with both the Dow and the benchmark S&P 500 Index (SPX) currently riding an upward trend in place since September, there is simply no readily apparent reason not to believe that that psychologically important level won’t be reached, and relatively soon.

The question that might be asked, however, is, “what happens then?”

Market corrections are inevitable, and during the current Bull Run of nearly five months, there has been just a single substantial correction, back in November, of around 4%. Was that enough to serve the purpose that corrections serve? Or does a deeper dive remain in the cards?

Answering that question requires observing the current situation.

The earnings season is now upon us, and will certainly contribute handily to the equation of market direction. It’s pretty early in that game, however, to tell how that will play out. Then there’s the Fed, always a factor. That august body certainly has added wind to the sails of the Bull ship, with the markets riding the air that emerged from the mouth of Ben Bernanke, as he pronounced “QE2! QE2!” And while the issue of systemic problems with the euro continues to concern investors, the euro bankers and economic ministers have proven adept at keeping the shell game in motion, deftly plugging holes and propping up banks, even small countries, as needed.

Still, other questions continue to emerge and reemerge, as if perhaps certain negative factors have been, if not exactly swept under the rug, primarily ignored by the markets. Last week’s poor unemployment numbers gave the markets reason to pause, since double digits in that category tend not to fit into anyone’s model of a resurging economy. The housing markets have not been thriving, either, with foreclosures continuing at a worrisome pace. And the financial health of entire states is now coming to the fore. Illinois, for example, has a $15 billion deficit, requiring a draconian hike in personal income taxes by 66%. Texas is expecting up to $27 billion in revenue shortfall over the next two years. New Jersey’s governor managed to skip a $3.1 billion payment to the state's pension system. The list, as they say, does go on.

Let’s not forget China, with its fast rate of rising inflation and the definite possibility that it is on the cusp of its very own serious housing bubble popping.

Now, if you take all of these things together, and shake them up and toss them down on the ground like runes to be read as an oracle, one can probably come up with as good an argument for a continuing uptrend as another could for the correction that will occur, inevitable as Sir Isaac’s apple falling down. The genius, of course, is knowing when the “When” is.

So what do you do? Stand pat? Back off? Or double down on your existing positions?

As always, you get to make the call. The best way to put the odds in your favor is to bone up on your own research, do some more homework, or, barring that, if you have a nice profit from the recent Bull run, take some money off the table and treat yourself to a sweet little vacation. Lord knows, the economy will welcome the cash infusion!

In the meantime, here is what the Periscope sees.

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.  In this case, forward looking is meant as about thirty days out.

Among the analytics that comprise these rankings, I find that what Sabrient labels as “Bullscore” and “Bearscore” often has value in terms of predictive properties. 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.

This week, I am choosing two of the top five Bullscore leaders, and, if you want to ride the current upward trend, these two ETFs could serve as an adequate vehicle. Feel free to hop aboard and ride them long.

If, on the other hand, you get the feeling that a correction is in the cards, at least in the short-term, I’ve picked two of the top five “Bearscore” leaders, which can be added to a portfolio for defensive purposes.

Taken together, however, these four ETFs may be combined to form a relatively conservative addition to one’s portfolio. Note, please, that it does not serve as either a true “pairs” or a “long/short” trade since none of the ETFs are being shorted.

In the top 5 of the Bullscore rankings sits KRE (SPDR KBW Regional Banking ETF), an exchange-traded fund launched by State Street Global Advisors and managed by SSgA Funds Management, Inc. It invests in stocks of companies operating in the regional banking segment of the U.S. banking industry. The fund seeks to replicate as closely as possible the performance of the KBW Regional Banking Index, an equal weighted index of geographically diverse companies representing regional banking institutions listed on U.S. stock market.

Also in the top Bullscore 5 is KOL (Market Vectors Coal ETF), which tracks the Stowe Coal Index. It provides exposure to publicly traded companies throughout the world that derive greater than 50% of their revenues from the coal industry.

IDU (iShares Dow Jones U.S. Utilities Sector Index Fund) sits close to the top of Sabrient’s Bearscore rankings. This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. utility stocks, as represented by the Dow Jones U.S. Utilities Index. It invests in water, gas and electric utilities.

Also within the top Bearscore 5 is XRT (SPDR S&P Retail).  An equal-weighted market cap index, it represents the retail sub-industry portion of the S&P TMI, which tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges.

ETF Periscope

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.

I didn't end up going bankrupt . . . I made some great investments and I held on to my money, which also enables me to have the freedom to do what I want now. But it's not about finances. No matter what, it's about keeping it real. -- Vanilla Ice

Off in the not-so-far distance and within sight of the horizon, the round, juicy number 12,000 looms. 12,000, as in Dow Jones Industrial Average (DJIA) 12,000.

The Dow 12,000 served as support in 2007 and again in 2008. That is, until June of that year when the bursting of the credit/housing bubble started to take down the markets in a serious manner. Now, two and a half years later, that same number seems tantalizingly close, and with both the Dow and the benchmark S&P 500 Index (SPX) currently riding an upward trend in place since September, there is simply no readily apparent reason not to believe that that psychologically important level won’t be reached, and relatively soon.

The question that might be asked, however, is, “what happens then?”

Market corrections are inevitable, and during the current Bull Run of nearly five months, there has been just a single substantial correction, back in November, of around 4%. Was that enough to serve the purpose that corrections serve? Or does a deeper dive remain in the cards?

Answering that question requires observing the current situation.

The earnings season is now upon us, and will certainly contribute handily to the equation of market direction. It’s pretty early in that game, however, to tell how that will play out. Then there’s the Fed, always a factor. That august body certainly has added wind to the sails of the Bull ship, with the markets riding the air that emerged from the mouth of Ben Bernanke, as he pronounced “QE2! QE2!” And while the issue of systemic problems with the euro continues to concern investors, the euro bankers and economic ministers have proven adept at keeping the shell game in motion, deftly plugging holes and propping up banks, even small countries, as needed.

Still, other questions continue to emerge and reemerge, as if perhaps certain negative factors have been, if not exactly swept under the rug, primarily ignored by the markets. Last week’s poor unemployment numbers gave the markets reason to pause, since double digits in that category tend not to fit into anyone’s model of a resurging economy. The housing markets have not been thriving, either, with foreclosures continuing at a worrisome pace. And the financial health of entire states is now coming to the fore. Illinois, for example, has a $15 billion deficit, requiring a draconian hike in personal income taxes by 66%. Texas is expecting up to $27 billion in revenue shortfall over the next two years. New Jersey’s governor managed to skip a $3.1 billion payment to the state's pension system. The list, as they say, does go on.

Let’s not forget China, with its fast rate of rising inflation and the definite possibility that it is on the cusp of its very own serious housing bubble popping.

Now, if you take all of these things together, and shake them up and toss them down on the ground like runes to be read as an oracle, one can probably come up with as good an argument for a continuing uptrend as another could for the correction that will occur, inevitable as Sir Isaac’s apple falling down. The genius, of course, is knowing when the “When” is.

So what do you do? Stand pat? Back off? Or double down on your existing positions?

As always, you get to make the call. The best way to put the odds in your favor is to bone up on your own research, do some more homework, or, barring that, if you have a nice profit from the recent Bull run, take some money off the table and treat yourself to a sweet little vacation. Lord knows, the economy will welcome the cash infusion!

In the meantime, here is what the Periscope sees.

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. In this case, forward looking is meant as about thirty days out.

Among the analytics that comprise these rankings, I find that what Sabrient labels as “Bullscore” and “Bearscore” often has value in terms of predictive properties. 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.

This week, I am choosing two of the top five Bullscore leaders, and, if you want to ride the current upward trend, these two ETFs could serve as an adequate vehicle. Feel free to hop aboard and ride them long.

If, on the other hand, you get the feeling that a correction is in the cards, at least in the short-term, I’ve picked two of the top five “Bearscore” leaders, which can be added to a portfolio for defensive purposes.

Taken together, however, these four ETFs may be combined to form a relatively conservative addition to one’s portfolio. Note, please, that it does not serve as either a true “pairs” or a “long/short” trade since none of the ETFs are being shorted.

In the top 5 of the Bullscore rankings sits KRE (SPDR KBW Regional Banking ETF), an exchange-traded fund launched by State Street Global Advisors and managed by SSgA Funds Management, Inc. It invests in stocks of companies operating in the regional banking segment of the U.S. banking industry. The fund seeks to replicate as closely as possible the performance of the KBW Regional Banking Index, an equal weighted index of geographically diverse companies representing regional banking institutions listed on U.S. stock market.

Also in the top Bullscore 5 is KOL (Market Vectors Coal ETF), which tracks the Stowe Coal Index. It provides exposure to publicly traded companies throughout the world that derive greater than 50% of their revenues from the coal industry.

IDU (iShares Dow Jones U.S. Utilities Sector Index Fund) sits close to the top of Sabrient’s Bearscore rankings. This ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. utility stocks, as represented by the Dow Jones U.S. Utilities Index. It invests in water, gas and electric utilities.

Also within the top Bearscore 5 is XRT (SPDR S&P Retail).

An equal-weighted market cap index, it represents the retail sub-industry portion of the S&P TMI, which tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Small Cap exchanges.

ETF Periscope

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.

ETF Periscope
daniel / Tag: DJIA, Dow Jones Industrial Average, IDU, KOL, KRE, S&P 500 Index, SPX, XRT /