Wednesday, October 8, 2014

And in the 4Q we are!

With 4Q 2014 off to an exciting start, it’s worth remembering that rarely do new trends or sectors emerge as winners this late in the year.  Rather, this is the time for harvesting and letting winners run until December when profits are booked and cash is freed up for the upcoming year.  After a wild summer ride with new record highs, the S&P 500 gave up ground to end up 2.53% while the MSCI ACWI index lost .48%.  So who actually has profits to harvest and who’s going to be calling Uncle Sam to try and cash in on crop insurance?

Let’s start by looking at our Behavioral 25 where eight of twenty five names are from the health care sector.  Biotechnology names continue to dominate the list and none too surprising since the iShares Biotechnology ETF (IBB) was up 14.41% in the third quarter compared to 7.67% for XLV and 2.53% for the S&P 500 while it’s SPDR sister, XBI, was up over 18.7%!  Both of the biotech ETF’s scored highly on technical scores but Sentiment scores were the difference as XBI was at the upper end of its historic put/call ratio and IBB ranked much higher on short interest.  The difference was also in the volume; take a look at the ETFG Tearsheets and you’ll see that IBB has nearly 5x the volume of XBI making it the fund of choice for short positions.

And what about those Portfolio Managers out there with a discretionary mandate and who need to make up performance?  While this quarter may be a lost cause, it’s never too late to start thinking about next year and using our ETFG Quant Screener.  

Which ETF’s score highest on the Sentiment scores while momentum couldn’t get much worse? And why for the love of heaven would you ever want to put money to work in these funds?  Because not only do they offer a combination of high short interest and momentum that couldn’t (in theory) get much lower, they have high implied volatility meaning if they do advance, a short covering rally might push them even higher.

After resorting the list on Sentiment scores and looking for weak momentum names, miners and precious metals take up the top spots with the Market Vectors Junior Gold Miners ETF (GDXJ) in the second slot and the iShares MSCI Global Gold Miners ETF (RING) at number 20.   High Risk = High Reward…eventually.

Thank you for reading ETFG Perspectives!

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