ETF Update: How To Play Short By Going Long

The Obama honeymoon did not last as long as it too him and Chief Justice Roberts to stumble through the Oath of Office, requiring them to take a “mulligan.” There is a lot of hope among average citizens and high approval ratings for the new President, but plenty of skepticism from the Wall Street pundits.

Trading Obama

The market is waiting for specifics on TARP, housing, and the stimulus package.  A large portion of the punditry is prepared to criticize any plan as one or more of the following:

• Too large or too small;
• Adding excessively to debt or crushing revenues;
• Laden with pork or not aimed at real projects;
• Emphasizing tax cuts (where people will not spend) or emphasizing government, where public spending crowds out private expenditures;
• Restoring normal lending versus doing more of “what got us here.”

Viewed from this perspective, it is pretty clear that no policy choice would gain popular acclaim.  As we noted in our 2009 preview, it will take some specific economic evidence  before most are convinced.

We track market developments by evaluating a universe of 57 ETFs.  For each fund, representing many different sectors, our model evaluates the Trend, Cyclical characteristics, and introduces a touch of Anticipation.  (For new readers, there is a more complete description of our methods and ratings at the end of the article.)

Inverse ETFs

With markets in decline there is widespread interest in making money when stocks move lower.  Even retirement investors who have legal restrictions on short selling can profit from delining markets by investing in inverse ETFs.  This is a “long” investment, since one owns the fund.  The fund, however, purchases securities that profit in a market decline.

Since this strategy has been a big winner in recent months, it is attracting a lot of interest.  We have included three of the inverse ETFs as part of our universe.  These represent shorts in the Nasdaq 100 (PSQ), the S&P 500 (SH), and the Dow Jones Industrial Average (DOG).

There are many other short and ultra-short ETFs.  Investors should study the characteristics and potential pitfalls carefully before adopting the more aggressive shorting strategies.  My colleague Scott Rothbort has an excellent introduction to the topic.  Eric Oberg, slso writing at TheStreet.com, explains how the leveraged inverse ETFs can provide extremely disappointing results in the long run, even when the investor has guessed right on the market.

These are mostly short-term trading vehicles.  The one-month time frame for our TCA-ETF model works just fine for the regular inverse funds, but we avoid the leveraged choices.

As our current ratings show, there is little to like about the current market.

Weekly TCA-ETF Rankings

The ratings reflect prices and signals as of Thursday night, January 22nd. In our daily trading program (for accredited and institutional investors) we buy the top eight sectors. In our weekly program for individual investors we stick with the top six sectors. The market had another week of decline.  During last weekend’s three days we saw nearly all of our sector ETFs join our “penalty box.”  This means that the trading has violated specific technical criteria, our equivalent of a “sell stop.”  During Tuesday and Wednesday’s volatile trading we shifted into the inverse ETFs.

This shift included our sector highlight from last week, the networking stocks (IGN).  While we try to find the key themes from our ratings each week, we cannot predict how the model will shift.  Sometimes, as was the case last week, we see rapid changes.  There should be no expectation that we will make public updates of each change, in advance of the weekly series.

We provide the ratings as interesting news information.  Readers may like to compare our rankings with other sources or their own analysis.  The weekly report is always delayed by at least one day.  As we note in our disclaimers, it is not intended as specific trading advice.

Because of the current ratings, we moved to a bearish stance in the Ticker Sense Blogger Sentiment poll. Only four of our fifty-seven sectors are in the “buy” range, and three of these are inverse ETFs.

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