ETF Update: The Energy Advance

There has been an interesting and dramatic shift in sector leadership.  The financial ETF’s, while still in our ‘buy’ range, moved lower in the rankings as markets awaited the results of the government “stress tests.”  Meanwhile, the interest in nuclear energy that we noted last week has broadened to include a variety of energy ETF’s.The model also shows continuing strong ratings for most sectors, encouraging a bullish stance on the market.
Background
Each week we report results from TCA model, which follows both Trends and Cycles while adding a touch of Anticipation.  We currently use a universe of 57 ETF’s include three index inverse funds.  The ratings give an interesting perspective on the overall market as well as specific sectors.  We hope that readers find this an interesting supplement to their own analysis.  We are always interested in suggestions for ETF additions, and expect to amend our universe in the near future.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).
Oil and Gas Exploration (IEO)
Our featured ETF this week is the iShares Dow Jones U.S. Oil & Gas Exploration & Production Index Fund (IEO).  The fund is strictly focused on energy and production stocks.  The top five holdings make up 37% and the top ten 56%, so it is not overly concentrated.  The beta is about 1.  The P/E ratio is about 11, reflecting continuing skepticism about oil and the economy.
The sector has made a big move from the March bottom.  Technical analysts might have trouble finding specific resistance in the chart.  IEO made the biggest weekly move in our model rankings, going from 30th to 7th in our rankings.  Here is the chart.

6a00d83451ddb269e201156f870f1b970c-450wi

Fundamental Analysis and Comment Much to our surprise, there was little attention paid to the strength in IEO.  Perhaps we will see some commentary during the next week.  Those looking at energy in general were pretty skeptical.  This analysis from Marc Courtenay is typical:

For most of us and myself included, a sustained rise in energy prices seems hard to justify. Short of some sudden and unanticipated disruption in supply, I would expect energy prices to top out in the next two weeks and then start heading down to the lower end of the range.

“There’s shock and disbelief that oil and gas can defy the normal historical reactions to supply and demand,” analyst Phil Flynn said in a client note. “Traders are calling me and are stunned with no idea of what is happening.”

Energy Fundamentals

Despite the lack of ETF commentary, there are some bullish signs for energy sectors.

Pumps highlights three factors:

  1. Summer driving season has helped take fuel prices to new highs.
  2. A pick up in China’s manufacturing which “…is generally a good indicator of increasing energy demand.”
  3. Growing support for the idea that world oil production has peaked, most recently from Raymond James.

The energy stocks that we follow have P/E multiples suggesting little expectation of economic improvement, OPEC cuts, or weather effects.  This may be the rationale behind the evidence picked up by our model.

Weekly TCA-ETF Rankings

51 of our 57 sectors are in the “buy” range.  Several sectors have extremely strong ratings.  The overall picture is even stronger than it has been in recent weeks.  The overall strength ratings have helped to keep us fully invested through the extended rally.

The daily portfolio gained 5.6% on the week, slightly trailing the S&P 500.  Based upon the model signals, we continue our official bullish position in the Ticker Sense Blogger Sentiment poll.

6a00d83451ddb269e201156f8713e6970c-450wi

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.


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