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ETF Periscope: Bulls Gone Wild

Posted on the 28 March 2011 by Phil's Stock World @philstockworld

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Courtesy of Daniel Sckolnik, ETF Periscope

“There are basically two types of people. People who accomplish things, and people who claim to have accomplished things. The first group is less crowded.” – Mark Twain

ETF Periscope:  Bulls Gone Wild
Bulls just want to have fun.

Really, as far as the equity markets are concerned, its almost like nothing ever happened.

Like Japan’s 9.0 earthquake, its biggest on record, never hit its coast and nearly shook it to oblivion.

Like a massive tsunami never swept far inland, tossing around houses, trees and boats like they were made of paper mache.

Like the Fukushima Daiichi nuclear plant never spewed scary levels of radioactive steam into the atmosphere.

Like numerous countries in North Africa and the Middle East region never experienced a massive degree of political unrest and chaos over the last few months.

Like Portugal never really experienced serious debt-related downgrades last week.

The Bulls have simply put down their collective heads and charged forward, either oblivious or unconcerned with any event that happens to conflict with their current worldview of an up-trending market.

Are there really brains behind the horns? Or not?

Sure, the markets got roiled a few days back around mid-March, immediately following the initial damage reports out of Japan. But here’s the thing. It took all of nine days for the Dow Jones Industrial Average (DJIA) to rally from a post–catastrophe low of 11,600 right back to 12,200, where it ended up on Friday. That’s 600 points. Put in perspective, it took the first two and a half months of the year for the Dow to gain that same ground.

That’s resilience of an impressive level. But is there “sense” in that resilience or is it more non-sense? Is such a Bullish paradigm warranted? Or are we witnessing, among other factors, a hyper-re-active market that dances to the rhythm of volatility simply because that’s how institutional algorhythms are instituting the bulk of their trades these days?

Regardless of the reasons, someone out there has decided that price points in the stock market have fallen to levels that are too attractive to pass up. Once the initial fear that accompanied the recent series of catastrophic, Black Swan events had passed, investors exchanged their fear for greed and undertook a buying spree that jacked the markets up to levels pretty close to where they were before the disasters had occurred.

Is this surge of optimism sound or folly? To some degree, it might serve to be a self-fulfilling prophecy, meaning that if the markets decide the recent spate of troubles are over for now, then, through the prism of majority perception, it becomes so.

A simple litmus test to help one decide if the markets’ cup is half-full or half empty may be taken. Consider, if you will, the recent damage done to Japan as a result of the elemental havoc. It is currently estimated by the Japanese government to be in the neighborhood of $300 billion dollars. As an investor, do you view that as an opportunity due to infrastructure replacement and related rebuilding efforts? Or are there more problems yet to arise from the rubble, potentially placing an additional strain upon a global economy struggling to emerge from the recession of the last few years?

For now, at least, the Bulls seem to be having the louder say on this matter.

As of the end of last week, at least, the trend rebounded resoundingly towards the upside, with the Dow having successfully hurdled the psychologically important 12,000 level, and the S&P 500 Index (SPX) doing the same with its own 1,300 mark. However, both indexes remain very close to their respective 50-day moving average, so lurking Bears still remain vividly in the picture.

What the Periscope Sees

In my search for a clearer read on the markets, I frequently reference Sabrient’s ETFCast Rankings.  They consist of over 300 ETFs (exchange-traded funds) that are ranked and scored via nineteen of Sabrient’s proprietary analytics, that, when taken together, offer a forward-looking take on the markets.

In choosing from the Rankings, I’ll scan down the current list of the top dozen ETFs. I’ll generally choose no more than one per sector, as I prefer a certain level of diversification. Next, I’ll look at the ETF’s chart, for after all,  “every picture tells a story.”  My reference points include support and resistance levels and simple moving averages. Lastly, I’ll see if the ETF offers options, as well as a reasonable degree of liquidity.

For a balanced approach to what remains, and will continue to remain, an extremely volatile market, here are two Bullish ETF selections, as well as a couple of Bearish choices. You can combine all four of them together to achieve a hedged “pairs” approach, or you can use them individually to support your own directional bias.

In this week’s top 10% of the ETFCast Rankings is PRN (PowerShares Dynamic Industrials Sector Portfolio Fund). It’s based on the Dynamic Industrials Sector Intellidex Index, which evaluates companies based on a variety of investment merit criteria, including fundamental growth, stock valuation, investments and risk factors. Securities shown to possess the greatest capital appreciation potential are selected by the Index. The Fund seeks investment results that correspond generally to the price and yield (before the fund’s fees and expenses) of the target index.

Also in the top 10% of the Rankings is VXF (Vanguard Extended Market ETF), which is an exchange-traded fund that employs a passive management or indexing investment approach designed to track the performance of the S&P Completion Index, a broadly diversified index of mid, small and micro-sized U.S. companies. The S&P Completion Index contains all of the U.S. common stocks regularly traded on the New York and Nasdaq Stock Exchanges, except those stocks included in the S&P 500 Index.

On the flip side, IYZ has a very low ETFCast Ranking. IYZ (iShares Dow Jones U.S. Telecommunications Sector Index Fund) is a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the real estate sector of the U.S. equity market, as represented by the Dow Jones U.S. Select Telecommunications Index.  The fund invests its corpus in common stocks of companies that form the Dow Jones U.S. Select Telecommunications Index as per their weighting in the index.

Also on the bottom of the Rankings is XBI (SPDR S&P Biotech ETF), an exchange-traded fund that invests in stocks of companies operating in the biotechnology sector. The fund, before expenses, seeks to replicate as closely as possible the performance of the S&P Biotechnology Select Industry Index, an equal-weighted market cap index which represents the biotechnology sub-industry portion of the S&P Total Market Index.

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.

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