Stock market predictions are enough to give the average investor the bed spins. If you haven’t started, the headline confusion is enough to cause people to start drinking.
For example, Scott Bleier, founder of Create Capital, says the bull market was all bull “based on stimulus and two rounds of quantitative easing.” According to Bleier, the market matador has won and the bull is dead.
One hundred and eighty degrees away, Byron Wien, the vice chairman of Blackstone Advisory Partners thinks differently, “Investors should be looking for buying opportunities. The economy is not as bad as it looks right now. Corporate profits will be good, very good. People are asking me, ‘Do you still think the market can get to 1,500 by the end of the year?’ I do.”
And Laszlo Birinyi, president of Birinyi Associates, agrees with Wien. Although Laszlo feels a 10% correction could come “at any time,” he sees the S&P at 1500 by year’s end too.
So which is it, a room temperature or raging bull? ETF Stocks doesn’t pretend to know what will happen in the next 6 months. Instead we focus on what the market is telling us to do right now. To paraphrase the words of many an athlete, ETF Stocks just tries to take advantage of what the market is giving us.
One of the ways we know which play to run is by looking at sector performance relative to the S&P 500. ETF Stocks divides the results into four teams:
- Emerging Bull
- Mature Bull
- Mature Bear
- Emerging Bear
By identifying which sectors are hot, and which are not, investors are better equipped to decide where to put money and where to take some away.
Here are this week’s results:
EMERGING BULL: industries with positive technical analysis traits that are in the early stages, indicating possible above average returns in the near-term:
- Beverages
- Computer Hardware
- Electricity
- Hotels
- Multi-utilities
- Household Goods
MATURE BULL: industries that have outperformed and their charts suggest the above average returns could continue:
- Biotech
- Food and Beverages
- Property & Casualty Insurance
- Leisure Goods
- Waste Disposal
- Pharmaceuticals
- Real Estate
- REITS
- Restaurants and Bars
- Soft Drinks
- Food Producers
- Telecommunications
- Toys
- Gas and Water Utilities
- Utilities
MATURE BEAR: industries that have under-performed and based on their current chart patterns, ETF Stocks believes could continue to lag:
- Asset Managers
- Construction Materials
- Home Improvement
- Commercial Vehicles
- Life Insurance
- Transportation
EMERGING BEAR: industries that have fresh negative technical analysis set ups and could have subpar performance in the weeks ahead:
- Autos
- Auto Parts
- Electronic Components
- Electronic Equipment
- Industrial Machinery
- Industrial Engineering
- Heavy Construction
- Diversified Industries
There are a couple of different ways exchange traded fund investors can put this report to work. The obvious way is to buy(short) a sector ETF from one of the teams above. For example, iShares Nasdaq Biotechnology (IBB) would be a good fit for Mature Bull member Biotech.
A more sophisticated way to utilize the sector scorecard, especially in turbulent times, is to buy an Emerging or Mature Bull sector ETF and short the S&P 500. ETF Stocks calls it Zero Trading and it’s a strategy used by many a hedge fund.
Remember, the basis for bull selections is sectors that have or appear ready to outperform the index. As long as the Bull selection continues to outperform the S&P, no matter what the market does, you’ll make a profit.
Let’s show you how it works.
Pharmaceutical HOLDRs (PPH) would be a good way to participate in Mature Bull member Pharmaceuticals – duh. You buy $10,000 of PPH and short an equal amount of SPDR S&P 500 (SPY). In essence, you have invested Zero dollars, a debit of $10,000 for PPH and a credit of $10k for shorting SPY (minus margin requirement, fees…) – hence the name Zero Trade.
Hypothetically, PPH drops 8% while the S&P gives back 10%. Pretty bad, right? Not for the Zero Trader. It’s true that PPH lost $800, but the SPY short is up $1000. A $1000 profit minus a $800 loss equals $200 or a 2% gain. Now that’s more like it.
Traders and investors can work the flip side of this by buying SPY and shorting an Emerging or Mature Bear sector ETF like iShares Dow Jones Transportation Average (IYT). Again, as long as the performance relationship stays intact, the trade will be profitable regardless of the overall market’s direction.
Since sectors tend to be more volatile than the S&P, ETF Stocks would suggest, buying the sector and shorting the S&P in an up market, and shorting the sector and buying the S&P in down markets.
More aggressive types, might consider buying a Bull sector ETF and shorting a Bear sector ETF. The principle is the same, as long as the bull continues to beat the bear, you are a winner too.
We certainly hope that you find our industry forecasts helpful in managing your portfolio. Of course, there are no guarantees, but it has been our experience that being in the right industries, and avoiding the wrong ones, can account for a lot of your performance.
