Tuesday, October 16, 2012

Quant’s movers today include 2 health care funds moving up into the ETFG 25 list.  The iShares Dow Jones U.S. Health Care Index Fund (IYH) gained 160 positions to rank at 18th place, its highest in months, and the SPDR Health Care Select Sector Fund (XLV) moved up 76 spots to 19th place, one less than the 18th place it reached last week which was its highest in months.  Is it good earnings news coming or perhaps a better performance from President Obama in tonight’s debate?  Like Joe Friday, Quant gives “just the facts ma’am” and lets others decide why, so let’s investigate how these two got here. Both come from strong sponsors and get solid Quality Scores of 78.2 for IYH and 76.9 for XLV.  On the other hand, health care has a low sector ranking which gives a low 50’s Global Theme Score for each fund.  Each category gets a 10% weighting.  Fundamental Scores get a higher 40% weighting and are decent for each where IYH gets a 70.9 and XLV 70.  In each case the Price/Cash Flow metric is the best and the Price/Book metric the weakest.   Quant analyses those metrics in the context of where each fund has traded historically so while they may not be as cheap as they have been, they are generating more cash than usual.  Earnings season will reset that bar but trading suggests the positive trend will continue.  We see that in the Behavioral Scores with each in the mid 70s (Behavioral also gets a 40% weighting).  Quant cross ranks on a scale of 100 but it is unusual to see scores better than the low 80s which would require top scores across all the various measurements.  XLV’s 74.9 Behavioral Score and IYH’s 74.6 are better than if they were on your kids’ report cards and each is better on the Technical side than the Sentiment side.  A look at their charts on the tear sheets shows why.   Each fund has come off a minor correction seen on the short term chart which boosts their short term score.  When you expand the time frame of each chart a steep mountain appears.  These 2 funds have been winners and Quant likes winners, especially after they have corrected like these have.  Market skepticism also provides solid Sentiment Scores with put/call ratios and short interest higher than usual for each. Quant looks at sentiment with a contrarian view and the algorithm says these two have further to run.  Maybe it’s politics or maybe it’s aging baby boomers, we’ll let you decide, but the facts predict good relative performance for each fund.

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