Monday, January 11, 2010

ETF's To Buy, Sell, or Hold

This is a follow up to the list of ETF's that I had presented with buy, hold or sell recommendations. See Table 1.

Table 1. ETF's

The list was last presented on December 20, 2009, and at the time, there was a predominance of hold and sell signals. All of these ETF's on this list had a clustering of negative divergence bars, and in the absence of having a crystal ball to predict market direction, the high odds play was to sell something, anything. This was an insurance policy so to speak of giving back hard won profits; furthermore, I had suggested you could re-enter the market on closes over the highs of the cluster of negative divergence bars (see column 2 in the table) as this would be a reason to get long again with the expectation that this price action most likely represents the proverbial blow off top.

Since late December, the market has found new life and many of these high points have been easily cleared. Thus, many of the hold and sell signals have been upgraded to "buy/ hold".

My definitions of buy, hold or sell are as follows:

A "buy/ hold" signal would be for those ETF's that have already closed above the highs of the recent negative divergence bar on a weekly basis. Because this has happened, there is the possibility that prices could accelerate higher. This trade is for the nimble.

A "hold" signal implies a trading range, and this is likely to change in time.

A "sell" signal is a sell signal. At best expect (or hope for) a trading range; more likely, an opportunity to buy at lower prices is ahead. How far the sell off goes is yet to be determined.

Now look to the last column of the table. GLD and XLP were downgraded to "sell"; these are noted with red dots. FCG and OIH have been upgraded to "buy" (green dots). All the others were upgraded to "buy/ hold" (black dots). These are the plays for the nimble and most likely represent a blow off market top.

What makes a "buy" better than a "buy/hold"? The ETF with the "buy" signal has not only cleared the highs of the cluster of negative divergence bars, it also has sold off sufficiently to generate enough positive momentum going forward. In other words, it has some room to run.

Since October 16, 2009, the S&P500 is up only 5%. This is nothing to dismiss especially since this annualizes to a 20% gain. But considering that the market is overbought, over subscribed, over valued, and facing inflationary headwinds, there is a high likelihood that these gains will not be sustainable. Nonetheless, a lot of angst has been generated over performance and keeping up. But I must stress that this is not the market environment that I find particularly attractive. I must ask you to think about the following: when and where do you want to put your hard earned money to work?

Lastly, I want to quote John Hussman and this is from his recent commentary:

"The present overvalued, overbought, overbullish, yields-rising conformation holds us back from accepting market risk here in any case. But the market is quite likely to clear this condition in one way or another over the next few months, most likely with an abrupt decline."

I quote Hussman here not to provide credence to my observations, but to note that I have come to the same conclusions using different data than Hussman. Although it seems that the market never goes down for more than two hours at a time, I find that a rising market often is the worst time to buy.


D-man said...

I would also add: as this market will never go down (if it does trillions are printed) an even easier strategy is to never sell as any divergence will be cleared and the market will move higher anyway. Also, buying on market rise is not a problem as any timing mistake will be corrected anyway as this market will move one way: higher ;-)

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