ETF Update: Can Networking Stocks Bounce Back?

Here we discuss a combination of fundamental analysis and system-based trading.  Both are affected by events, but in different ways.

Our fundamental viewpoint, presented in our 2009 Outlook article, is relatively bullish.  Many stocks are priced for a depression.  We believe that economic policies, both those in the pipeline and those on the verge of passage, will have a significant impact.  When the data convince people that there will not be another Great Depression, the DJIA (^DJI) can bounce back to 11,000.  How long will this take?  It depends upon two things:

1. The variable and uncertain lags of economic policy, and
2. The recognition lag and skepticism of investors and traders.

We expect this to play out in a matter of months.  Most investors risk missing the major part of the gains by trying to guess a bottom.  For our new clients we have been deploying assets gradually, looking for good entry points for individual stocks.

Our system-based viewpoint changes with the regular output form our model.  This is a way of looking at individual sectors by considering ETF’s.  Our modeling expert, Vince Castelli, created a combination of Trend, Cycle, and a touch of Anticipation.  This TCA-ETF approach provides a daily forecast for each ETF in our 57- member universe.  Following the changes in this universe helps us look at both the trees and the forest.  Perhaps it can do the same for you.

The system output shows a dramatic change from last week.  This is a normal response to two weeks of heavy selling pressure.  Only 13 of our 57 ETF’s remain in the “buy” range.  We provide the Thursday output each week; our Friday readings are even more negative.

Reconciling the Two Approaches

Helpful readers often provide the results of their own trading approaches.  Like our TCA-ETF method they are all pretty negative for the short term.  Recognition of the current trend is an established and successful trading approach.

One correspondent asked why we were “leading the sheep to slaughter” in our 2009 Outlook.  His chief reason was that his market indicators suggested more selling to come in the next few weeks.

The resolution is straightforward, a matter of time frames.  Our TCA-ETF method is geared to a one month forecast.  Circumstances change, and change rapidly.

Networking Stocks in the Spotlight

Each week we feature an ETF that has special interest, often making a big move up in our rankings.  For several weeks the sectors have reflected an expectation that the Obama Administration would help certain stocks through the expected stimulus package.  At our sister site, ElectionStocks.com we have a strong body of information on the transition initiatives, including the networking sector.  This is part of the broadband initiative.

Our networking ETF is the iShares entry, the S&P North American Technology-Multimedia Networking Index Fund (IGN). The fund has a P/E ratio of 21.4 and a beta over 1.5.  This is a trading vehicle, unless one has strong, long-term conclusions about the stocks.  The big networking names are included:  Research in Motion (RIMM), Qualcomm, Inc. (QCOM), Cisco Systems, Inc. (CSCO), Corning, Inc. (GLW), and Motorola, Inc. (MOT).  These five holdings make up about 40% of the fund.

It is an aggressive choice in a difficult time.  Here is a look at the chart:

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, January 15th. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors (free report available upon request) we stick with the top six sectors. It was another tough week for the market, and we were about even against our benchmark S&P 500 (^GSPC).  Our methods work best when catching big down moves, or in sustained rallies.

Based upon the current ratings, we moved to a neutral stance in the Ticker Sense Blogger Sentiment poll. Only thirteen of our fifty-seven sectors are in the “buy” range.

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