ETF Update: Back To The Home Builders

Sometimes the news moves faster than the system.  The announcement this weekend of the Fannie Mae (FNM) and Freddie Mac (FRE) bailout will change prospects for the overall market as well as specific sectors.

The Street has been anticipating a plan, and that may have influenced some “bottom fishing” in the home builder stocks.  This helps to explain our ratings — a strange mixture of energy positions, financials, and the inverse NASDAQ short ETF, PSQ (PSQ).

Even when one’s methods include some anticipation, as we have in the TCA-ETF system, one cannot guess which week will produce the government response to a crisis.  It could have been three weeks ago, or it might have dragged on until after the election.  The real point of clarity is that the market hated the uncertainty, as we saw in last week’s trading.

Dow Jones U.S. Home Construction Index Fund

We featured this index a month ago, but it later fell out of the top rankings.  Here is the basic information on the fund:

Tom Lydon notes yesterday that the home builders were showing strength.  Charles Kirk’s excellent daily commentary also observed on Friday morning the strength in Centex (CTX) and the hedge fund rumors.  Doug Kass and Jim Cramer at TheStreet.com have also been discussing possible plays to benefit from a bailout, which they both anticipated.

Having said this, most observers felt that there was plenty of time for investors to wait for signs of a bottom rather than guessing exactly when government action would occur.  We agree.  There is plenty of time to profit.

Weekly TCA-ETF Rankings

This week was as bad as it gets for the system, checked against our long-term testing.  When Gustav missed the key refinery and drilling areas, it started some dominoes falling.  The immediate speculation came out of energy prices — but there was more.  Apparently there were commodity hedge funds which had highly leveraged positions, large enough that they immediately began liquidation.  This led to further hedge fund selling.

As we have noted, many of the energy stocks should not be that sensitive to the front-month spot price of oil.  The fundamentals are based upon long-term drilling, exploration, and service needs.  Since many fund managers and investors use the ETF’s as a proxy for oil prices, the reaction is sometimes exaggerated.  This may well provide an excellent opportunity for investors with a longer time frame.

Meanwhile, the good news for the country (and regardless of one’s investment position we must always be thankful when people and property are not harmed) was bad news for the portfolio.  Obviously, this could have had a very different result.

This is important to recognize.  Many investors develop perfectly back-fitted systems that catch every turn.  In practice, one must realize that big rewards, as we have picked up in the last few months, also carry a risk.  Having confidence in the long-term prospects of one’s method is the key to riding out the adverse swings.

We expect the rankings to change rapidly as the Fannie and Freddie news gets reflected in new sector rotation moves.

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

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

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