ETF update: some tasty chips?

ETF sector leadership continues to shift rapidly. The most dramatic move of the week came from a semiconductor ETF, which moved from #37 to #5 in the ratings from our TCA-ETF model. We try to look at both Trend and Cycle, while doing some Anticipation of key swings. Ideally, we exit positions when new ETF’s gain strength, surpassing current holdings. Over the last few weeks there have been several dramatic changes of sector leadership. (For new readers, there is a further explanation of our approach at the end of the article.)

The sector moves are also a path to deeper understanding of the overall market. As usual, we shall start with some fundamental factors that underly semiconductor strength.

S&P North American Technology-Semiconductors Index Fund (IGW)

This week’s featured sector is the iShares S&P North American Technology-Semiconductors Index Fund (IGW). The fund has about fifty holdings with the top ten constituting about 57% of the fund. The P/E ratio is about 21. As one would expect from a technology fund, it adds some octane with a beta of 1.5.

We prefer the iShares ETF to the semiconductor HOLDR’s (SMH). SMH because of more emphasis on capitalization weighting, the top ten holdings constitute almost 90% of the fund with the top three representing 57%.

Semiconductor Fundamentals

The interest in semiconductor stocks is more a look ahead than a reflection of past performance. Applied Materials earnings were acceptable, but more importantly, the company sounded a note of optimism unusual in the current market. CEO Michael Splinter not only sees a bottom from the past quarter but is looking for a 30% increase in orders.

Jim Cramer observed that this is a bit early in the annual cycle for funds to be buying chip stocks, but the move out of energy may be leaving some managers looking for an attractive alternative.

Some other technology ETF’s have joined in the move up our ratings.

Weekly TCA-ETF Rankings

This week’s report does not include trades made on Thursday. The positions continue to catch most of the main themes, including the current shift to technology.

The fraction of sectors in the “penalty box” has moved lower, a continued improvement in the overall picture. The overall market indexes have pulled significantly ahead of the inverse index ETF’s.

Using the model as our guide, we continued our “bullish” forecast in the Ticker Sense blogger sentiment poll.

Listed below are the week’s rankings and our trades:


Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF’s and Sector Rotation. Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method. In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike. While we urge readers to check out the entire article, the key point is that ETF’s pose challenges and opportunities different from investment in individual stocks. The fundamentals may be more difficult to assess. Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF’s. This means that those trading with a fundamental approach (and we do this as well) want to monitor the “hot money” moves. Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit — thus the name of the model, TCA-ETF. While we do not reveal the exact methodology for spotting trends and cycles, the system is not a “black box.” The basic elements are used by many, and widely reported. We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model. We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Full Disclosure: We are also long AMAT in both partnerships and individual accounts.

Orignally published at A Dash of Insight and reproduced here with the author’s permission.

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Aaron Menenberg Policies of Scale

Aaron Menenberg is Foreign Policy and Energy analyst, and a Future Leader with Foreign Policy Initiative. He also co-hosts Podlitical Risk (@podliticalrisk). He is a graduate student in international relations at The Maxwell School of Syracuse University. Previously he has worked at Praescient Analytics, The Hudson Institute, for the Israeli Ministry of Defense, and at the IBM Corporation. The views expressed are his own, and you can follow him on Twitter @AaronMenenberg. He welcomes questions and comments at