 The ETF Authority for Monday, July 7th, 2003 Volume 2, Issue #27 Published weekly on Sunday evening, The ETF Authority is a short-term trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
Note: This
is a fee-paid, subscribers-only newsletter.
Any republication or retransmission of this web page or any of the
contents herein is expressly prohibited. Click on the link below to
subscribe to this newsletter today... We urge all readers to print out this
newsletter each week for maximum benefit... (1.) MARKET SUMMARY Did the Bradley Model Work? The Technicals Seasonal Patterns The Bottom Line ECONOMIC ANALYSIS The monthly payroll report came out weaker than expected as well. Non-farm payrolls tumbled 30,000 -- well below expectations for a flat to slightly down result. The unemployment rate jumped as well, reaching 6.4%. About the only positive was the jump in temporary workers, which may be a precursor to future hiring. The ISM did release a bit of good news. Services (things like restaurants and consultants) data improved, reaching an index level of 60.6 from 54.5. That shows strong expansion. Next week will be an extremely quiet one on the economic front. Weekly unemployment claims, as always, are due out on Thursday. They remained at disturbingly high levels last week (430,000). Producer prices (in essence, prices that manufacturers pay, as opposed to what you and I pay) will be released on Friday. The forecast is for a gain of +0.2%, with prices excluding food and energy seen increasing +0.1%. In other words, inflation is still a non-factor. WHERE DO WE GO FROM HERE?
http://www.StreetAuthority.com/subscribe-etf.htm Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
(3.) ETF RELATIVE STRENGTH MONITOR (Note: If you're a first-time reader or you are otherwise unfamiliar with our proprietary ETF Relative Strength Monitor, then please click here for a brief description.) If there's one consistent story recently, it has been the incredibly poor performance of the oil patch. The Oil Service HOLDR (OIH, $60.15) has the lowest relative strength rating of any non-bond-market ETF we follow, and its -4.57% loss over the past four weeks is worse than any on our list with the exception of the Nasdaq Biotech iShares (IBB, $68.40). The difference between these two funds, of course, is that IBB has gained +28.96% over the past 13 weeks, which ranks it tops on our list, while OIH has gained just +10.21%, which ranks it near the bottom of our tracked funds. With OIH nearing important support, it may be time to think about picking up a bit of this ETF. The technology sector rallied nicely last week (excluding software, that is). Semiconductor HOLDRs (SMH, $29.24) jumped +3.10%, ranking this fund number two on our hit parade. Also rising more than +2.00% were the Canada WEBS (EWC, $11.91), which rallied +2.67%, and the Japan WEBS (EWJ, $7.75), which rocketed +7.04%. (You can view our analysis of EWJ in our "ETF Spotlight" section below.) Here is this week's ETF Relative Strength Monitor...
S&P 500 Model Portfolio The stock market beat us last week, as the sharp drop on Tuesday morning forced us out of half of the long position we held in the S&P 500 SPDR (SPY, $98.74). We managed to buy IBB at a fairly low level however, when we reversed at the open on Monday. That was quite a good move. For next week, I am going to buy 100 shares of OIH if it dips a bit more. In addition, I'm going to short 700 shares of EWJ. This week's instructions are:
MODEL ETF PORTFOLIO
SELL SHORT 500 SHARES JAPAN iSHARES MSCI WEBS (EWJ,
$7.75)
******************************************** SELL SHORT 500 SHARES OF EWJ AT THE OPEN ON MONDAY, JULY 7TH, LIMIT $7.50. YOU MAY SHORT IT ON A MOVE BACK ABOVE $7.50. TARGET: $7.20 Assuming a sale at Thursday's
$7.75 close and a purchase at our $7.20 target, you would make $275 from
this trade, or +7.1%. (6.) CONTINUED GUIDANCE ON PREVIOUS TRADES SELL SHORT 100 SHARES PHARMACEUTICAL HOLDR (PPH,
$81.42) ON A BOUNCE, AND AT THE SAME TIME BUY 20 SHARES OF ELI LILLY (LLY,
$69.27) PPH remains a weak performer, as it lost ground last week. I wouldn't be surprised to see the fund bounce slightly higher from these levels, but I still wish to short it. However, LLY gained ground last week and is near a breakout. I doubt that it will be able to gain traction above its $71.40 high, and after a surge it is possible, there would be substantial downside risk there. Therefore, limit purchases of LLY and buy only if LLY can be had for less than $71.12.
TARGET (PPH): $79.18 Assuming a sale at $83.78, and
ignoring the effect from LLY, you will make $460 from this trade, or +5.5%. We initiated this new section of the newsletter a few weeks ago, and since then I have told you all about the QQQs and the Biotech iShares (IBB). Another extremely popular fund is the iShares MSCI Japan Fund (EWJ). Because this fund owns stocks domiciled in Japan, there's a lot to learn here, so let's get started! ISHARES MORGAN STANLEY CAPITAL
INTERNATIONAL (MSCI) JAPAN FUND (EWJ) There are many important things you should know about EWJ. First of all, it is more expensive to trade in Japan than it is in the United States. Because of this, the expense ratio of the fund is much higher than that of most other ETFs. This means that the value of the fund will underperform the actual index by a greater amount than many other ETFs will. However, keep in mind that we are still talking about a difference of less than 1% per year.
Before you trade EWJ, you'll also want to understand a number of other key facts. Take a look at the two charts above. The chart on the LEFT is that of EWJ. Meanwhile, the chart on the RIGHT is of the Nikkei-225 Index. Although they are quite similar, you'll notice a number of substantial differences between the two charts. There are three reasons why these two indices do not correlate perfectly:
We've already discussed the first two differences, but let's think about the third for a moment. If you own Japanese stocks, do you think it is good or bad for you for the U.S. dollar to be strong? If you said bad, then you are correct. Why? Imagine you buy 100 shares of Sony stock. Make believe, for a moment, that Sony's shares sell for 100 yen each. That means it will cost you 10,000 yen to buy a those shares (100 times 100 is 10,000). Now, also make believe that you can buy 100 yen for $1.00. That is the same thing as saying the U.S. dollar -- Japanese Yen exchange rate is 100. So, if you can buy 100 yen for a dollar, then it will cost you $100 to buy your 100 shares of Sony (10,000 yen divided by 100 equals $100). Now, imagine that Sony's stock jumps 10% to 110 yen per share. That means that the stock is worth 11,000 yen. Pretty cool, huh? But wait a minute. Also consider what happens if everybody decides that the U.S. economy is going to do a lot better than the Japanese economy, and that the U.S. Treasury Secretary just said he wants to see the U.S. dollar go up in value. In this scenario, the exchange rate between the dollar and the yen might change substantially. In our example, let's say that you can now purchase 115 yen for one dollar. If this were to take place, then when you convert your Sony shares back to dollars, you will get just $1.00 for every 115 yen you now hold. In other words, you will get back 11,000/115, or just $95.65. What this means is that even though Sony's stock climbed +10%, you still lost -3.35% on your investment! Of course, it can work the other way as well. If the dollar weakened to, say, 90 yen per dollar, then your same 100 shares would now be worth $122.22, which would equate to a +22.22% gain. What does all of this mean to you as an investor? Well, first of all, it means that if you decide to look at a chart of the Nikkei-225, you shouldn't expect it to look the same as a chart of EWJ. It also means that before you invest in EWJ, you need to do your analysis on that fund, on the Japanese stock market overall, and on the dollar/yen exchange rate. (As luck would have it, I do all of this for you in this weekly newsletter!) A few additional notes. You may have noticed that many of the stocks shown as belonging to EWJ trade on the New York Stock Exchange. These are shares that represent the shares traded in Japan (American Depositary Receipts) in most cases, and they are directly affected by the exchange rates as well. You cannot get around the dollar's shifting value versus the yen. Also, note that some of the companies are not widely traded in the United States (Tokyo Electric Power is one such firm). Although it makes up a sizable portion of the fund, it is only available via the Pink Sheets (many brokers don't even trade these illiquid stocks). The shares rarely ever trade in the U.S., and you might not be able to buy or sell odd lots either. EWJ is also unique for another reason. Because the fund is really based on what happens in Japan, you have the rare opportunity to enter and exit trades based on trading that already occurred. You can do so by shifting your buy and sell points prior to the opening of the U.S. markets. If you are completely wrong in your assessment of EWJ and have not entered into a trade, then you will not get blindside here, since you'll have a pretty good idea of where the stock will open. The flipside is that the real activity in EWJ essentially occurs while you are most likely fast asleep. Unless you want to trade the futures markets at night in another country, you will not be able to get into or out of a position in EWJ while the real action is happening.
HOW TO MAKE MONEY IN EWJ THIS
YEAR Looking at the longer-term picture, however, EWJ could make for a decent addition to your portfolio, as it will help you diversify your holdings. After all, the fund is not as closely correlated with U.S. stocks as most other funds would be. This could lower the volatility of your overall portfolio returns. Additionally, in the long run I expect Japanese shares to outperform U.S. shares. (Remember, I do not think that U.S. stocks have bottomed, while their Japanese brethren may have.) The biggest problem right now is that the dollar might also make gains against the yen. Although that does not seem to make a whole lot of sense if you think that Japanese shares will outperform U.S. stocks, currency rates are not just affected by the stock market (in fact, despite what you might read elsewhere, equity markets are probably a very small part of what causes a currency's value to change). Although the Nikkei-225 chart appears to have bottomed, EWJ does show some risk of making a new low. Therefore, I'd suggest you steer clear of the fund for now, unless you wish to hedge the dollar.
Hedge the dollar?!? That is only for people who know a whole lot about exchange rates. But with a bit of sophisticated trading, you could own the stocks in Japan, but you could also place a bet on the U.S. dollar gaining versus the yen. This would be complicated, risky and expensive to do, and you probably couldn't do it with a stockbroker either. Bottom line: Initiate long positions in EWJ later this year, but wait for the fund to dip 10-15% below current levels. If you must trade it now, then short it. (8.) WEEKLY EDUCATIONAL BONUS -- WHAT'S ALL THIS SENTIMENT AND EXPECTATIONS STUFF YOU'RE ALWAYS TALKING ABOUT? Technical analysts love to lean against the crowd. It is a built-in reaction and an interesting psychological phenomenon. I am rarely comfortable if too many people agree with me. At the same time, it is incredibly difficult to make a trade when you are all alone. This is exactly what sentiment is all about. Every trend is comprised of a period where only the lucky few are in on it (some call this the "smart money"). For example, at the lows in October 2002, almost everybody was writing about how the rally was a mere bear market bounce. I still believe the rally is, but it is a huge one, and it is probably not over yet. Finding buyers then, or even at the March 2003 bottom, would have been tough to do. The next step in a trend takes place when the so-called "technical traders" jump on the bandwagon. The whole world has not yet caught on, but volume starts to pick up. If you're in the early stages of a bullish rally, then the market (or the particular stock) is making higher highs and higher lows. The opposite is true if the trend is down. Prices will actually start to move higher (in a rally) more quickly -- meaning that momentum is on the rise. Soon after, the "crowd" kicks in. It is not a bad thing to be on the same side of the crowd at this point. The move is not over yet. The final part of the run sees everybody jumping in feet first, and not even looking. Look at all the sellers after September 11, 2001, or at the bottoms in October 2002 and March 2003. Or even better, the buyers at the March 2000 top. Usually, you have almost everybody playing from the same side, be it long or short. People are fully invested and there's nobody left to buy (in a bull market) or to sell (in a bear market). This is when contrarians -- those that like to trade against the crowd -- make their money. The above description, by the way, is largely a partial explanation of Dow Theory. If you are interested in Dow Theory, then pick up Technical Analysis of Stock Trends by Edwards and Magee. (You can purchase this book at a discount by clicking here.) So, how does one measure sentiment? There are many ways. I will discuss a few of these below. Surveys and Polls: There are surveys everywhere you look that ask investors, traders, analysts and portfolio managers what they think about some investment or other. The ones that measure portfolio managers' bullish or bearish leanings are best known. CNBC talks about them all the time. I take part a short-term oriented one that is published by the former head of Knight-Ridder's Chicago bureau. Some come out weekly, some monthly, some even daily (I am not so sure daily sentiment indications are terribly meaningful). In order to really use the data generated by a particular survey, you first need to understand that survey and to know the levels at which its extremes have typically foreshadowed changes in market trends. Also, you must keep up on the survey itself. Some surveys gain and lose participants frequently, which can make comparisons to previous time periods useless. Some are very short-term oriented, while others are longer-term in nature. Regardless of how the survey is constructed, the idea remains the same: Most of the time the data will tell you little. However, at historic extremes the survey might accurately forecast an imminent trend reversal. I would never suggest making a trade based exclusively on one of these polls, but it is a piece of evidence worth considering. Asset Allocation: What is Wall Street telling you? If most major brokerage houses are recommending that you allocate 70% of your portfolio to common stocks, then that is usually a sell signal. If they are at 50%, then it is often a buy signal. Richard Bernstein at Merrill Lynch tracks that information, but you can probably find out what most big brokerage firms are recommending for free on their web sites. The idea is that most companies rarely push the stock market portion of a portfolio above 70-80%, or below 50%. For those big-picture bears, the asset allocators have been near 70% throughout much of the bear market. We will most likely not have a final bottom until nobody cares anymore and allocations fall down near 50% again. Options Volatility: If you've been reading this newsletter for awhile, then you've seen me talk about the S&P 500 VIX (Volatility Index) and the similar Nasdaq-100 VXN. These measure the implied volatility of at-the-money options on these indices (see http://www.investorwords.com for definitions of these terms). Typically, very high volatility can signal a bottom in the stock market, while low volatility may warn of an impending top. However, volatility can be seasonal. It gets low in the summer months, so you must always be aware of those patterns. Note also that the underlying indices can change. For example, the Nasdaq-100 removed a slew of technology sector stocks last year. The changes have made that index less volatile due to its more docile make-up. Therefore, one would expect lower volatility in general from that volatility index. Newsletter Writers Bull/Bear Levels: Several prominent publications that track the percentage of newsletter writers that are bullish or bearish. Unfortunately, newsletters come and go, and I am not convinced that these types of indices make a good sentiment indicator. However, if all newsletter writers (or nearly all) are bullish or bearish, then I would stand up and take notice. Hopefully, this one will not be with everybody else! Rydex Fund Ratios: Rydex has bull and bear funds as well as bond market funds. Tracking how much money is in each of these funds has, in the past, provided good short-term to medium-term buy and sell signals. However, I've heard some talk on Wall Street recently that hedge funds have been using the Rydex Funds as hedging vehicles, which has altered the nature of this method. Mutual Fund Cash Flows: Trimtabs and others publish, with a delay, how much money is flowing into and out of stock, bond and money market funds. Losses of momentum or extreme inflows/outflows may precede a major change in trend. Mutual Fund Cash Levels: These data are reported with a delay. However, if a bond fund is 100% in bonds, then unless new money flows into the fund, it will not have any more money to allocate to bonds. Since funds represent a large portion of market activity, if cash levels are very low, then there is probably very little room for the market to post further gains. If cash levels are high, then portfolio managers are being conservative and are probably under-invested. Any rally will force managers into making major purchases as they attempt to "catch up" to their benchmarks. In summary: Sentiment indicators are supposed to help you determine what the crowd thinks. When you're in the middle of a trend, the crowd is usually correct. However, they get on board late and leave late. Sentiment indicators can help you identify what the crowd is thinking. I would rarely ever trade just based on a sentiment signal, but when coupled with other technical signposts, you can often make a lot of money if you understand how to use them. If you want to read about manias and sentiment, then I suggest Charles Mackay's classic: Extraordinary Popular Delusions and the Madness of Crowds. (You can purchase this book today by clicking here.) Thanks again for reading this week's issue, and good trading in the week ahead!
|
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ABOUT OUR
EMAIL POLICY You are receiving this email because you visited StreetAuthority.com and subscribed to our premium ETF AUTHORITY service. This newsletter is sent out only to paid subscribers and limited-time free-trial members. If you feel you have received this issue in error, or if this email was forwarded to you without our express written permission, please contact us by visiting our web site at the link below. We sincerely hope that you benefit from your subscription to our
premium ETF AUTHORITY service, and we’re willing to do
whatever it takes to keep you as a satisfied customer. If at any time you
would like to contact us (for example, to make a recommendation or to
inquire about your account), you can do so by visiting our web site at ADVERTISING INFORMATION ===================================== DISCLAIMER The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions. StreetAuthority receives no compensation of any kind from any companies that may be mentioned in our newsletters or on our web site. Any opinions expressed are subject to change without notice. Owners, employees and writers may hold positions in the securities that are discussed in this report or on our web site, but are barred from trading any of these securities seven days before and after the initial publication of this report in accordance with our company policies. (c) Copyright 2003. StreetAuthority LLC and Poser
Global Market Strategies Inc. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
