ETF Update: Good Potential For Alternative Energy Over The Next Month

The quest for performance sometimes drives a rapid shift from one market sector to another.  This can come from major hedge fund reallocations, but also due to marginal changes from large mutual funds.  Our TCA-ETF model shows us the direction of these moves by capturing recent trends.  It also includes some sectors that we expect to return to favor on a cyclical basis.

Even for those not interested in trading based upon a sector program, looking at the changes in ratings paints a picture of overall market interest and activity.  Based upon a reader’s suggestion (Thanks, TT!) we recently added a “prior week” rating to our report.  It is interesting information.

This week we see that the most favored sectors have moved quite rapidly from much lower positions.  This reflects a decline in some recent high rankings, as well as recent strength in some new groups.

There are two major highlights:

1. Energy sectors have regained interest.
2. The overall market is much more negative, even more so than suggested by the broad averages.

As we write this, Gustav has (thankfully) lost force before hitting the coast, which will surely result in lower oil prices, and maybe a knee-jerk shift away from during the coming week.
Alternative Energy

One result of the recent spike in oil prices was renewed attention to alternative energy sources.  The political campaign and the Boone Pickens plan have also contributed.  Alternative energy has moved to the top of our rankings, indicating good potential over the next month.

The Global Alternative Energy ETF (GEX) is a good way of investing in this concept.  The fund is based upon the Ardour Global Index.  Van Eck Global describes the index as follows:

AGIXLT is a rules-based, global capitalization-weighted, float adjusted index intended to give investors a means of tracking the overall performance of a global universe of listed companies engaged in the alternative energy industry.

The index includes a 2/3 weighting on foreign companies and relatively good diversification.  While the top five companies constitute 43% of the fund the overall concentration falls off rapidly.  It is 46% solar and 26% wind, with a beta of 1.6.

Investor’s Business Daily notes the relationship between oil prices and solar.  While we should probably be taking a long-term view on alternative energy, the excitement grows when there is more fear about oil prices.

Richard Widows at TheStreet.com notes the improved prospect for alternative energy, changing ratings on the sector. (For those interested in options, Adam Warner’s excellent work at the Daily Options Report, one of our featured sites, points out the decline in volatility for First Solar (FSLR).  Adam notes that it is almost like an “employee discount price” for solar energy.  Be sure to check out his chart.)

On the negative side, Eric Savitz cites research suggesting that solar module prices are expected to fall.  This would seem to be bad for the companies involved, but it is a bit more complicated.  Lower prices for alternative energy make these sources more competitive with fossil fuels.

These are all good observations.  The question remains:  Will political actors act to improve our long-term energy prospects, or will attention relate to the current price of oil?

Weekly TCA-ETF Rankings

This week’s report of rankings is based upon Thursday’s closing prices, and our Friday trades are not  included.  There were some rapid changes in the favored sectors, with a rapid ascent from the various energy ETF’s.

The fraction of sectors in the “penalty box” has continue to move higher, reflecting continuing deterioration in the overall picture.  The index ETF’s for the Dow, the S&P 500 and the NASDAQ, both short and long, are all in the penalty box.
Using the model as our guide, we continued our neutral forecast in the Ticker Sense blogger sentiment poll.

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

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