A Dash of Insight

Employment Situation Report Preview

Each month we ask the question, "What change in payroll employment would be consistent with other economic data from the same time period (the middle of the prior month)?

This is not a forecast, per se, since we do not posit any causal relationship among these variables.  They are all concomitant indicators of economic activity.  We use the four-week moving average of initial unemployment claims, the University of Michigan sentiment survey, and the ISM manufacturing report.  We carefully choose data from the correct time period.  Even though the ISM report was released today, the survey is obviously from earlier in the month.

None of these indicators have improved very much, so we continue our negative outlook on employment.  We were surprised last month when the job losses were less than we (and nearly everyone else) expected.  We are still looking for losses over 550K, much worse than the consensus loss of about 400 K.

Since our analysis is based upon the final data, after all revisions, the ultimate accuracy may not be known until next year!  That is when final benchmark revisions are done.  Also, the sampling error (90% confidence interval) alone on the payroll survey is more than +/-100K jobs.

Other Predictions

In addition to the consensus forecasts, there are various predictions using proprietary data.  These are all interesting.

TrimTabs uses data from income tax deposits of salaried employees.  They expect job losses of 472,000.

ADP uses data from their payroll administration business, information that no one else has.  They have attempted to gear their results to the "official" government report.  They forecast a loss of 473,000 jobs, amazingly close to TrimTabs.

New entrant Wanted Technologies uses an algorithm reflecting online job ads.  They have a startling forecast:  a loss of "only" 260,000 jobs.  Furthermore, they made their call on June 19th.  And why not?  That was the right time frame to match the payroll survey, and their online job data is more readily available in real time.

Conclusions

Our own prediction of the jobs report has no special inputs -- just the analysis of concurrent economic data.  We are surprised to be the most bearish of the group.  As noted, the error band is wide.  The market will react wildly without regard to the sampling error or other issues.

We do have a few predictions that we can make with more confidence:

• Whatever the job loss, the unemployment rate will move higher.  The demographic factors at work require job gains of at least 150,000 (and probably more) just to maintain current unemployment levels.  The unemployment rate is an important social and political indicator, but it will lag in reflecting an economic change.
• The assembled punditry will state, whatever the number, that it should have been worse because the government is incorrectly projecting job creation. 
• If the result is really good, the rumor mill will start, as it did last month.  When the market spiked on a better-than-expected report for May, the rumors quickly circulated that it was an error -- a government worker had a "fat finger."  Those circulating this rumor (and those believing it) have absolutely no concept about how government reports are assembled, how many people are involved, and how many check points there are.

It just shows that if you want to be short going into this report, you can have confidence that the Bearish Blogging Network (TM OldProf) will have your back.  They will take advantage of the blogosphere to spin at high speed.  The official sources have to wait for a news conference or an interview to reply.  This is plenty of time to cover your shorts.

It is an attractive trade for any hedge fund manager.  Take last month as an example.  You could come in short and be an instant winner on a bad number.  If the report was positive,  you sell more on the spike (averaging up in price).  You then cash in on the silly "fat finger" rumor and the expected monthly spin on the birth/death adjustment.

How Can this Work?

It is amazing.  Take a roomful of traders.  Ask them whether government or a trading desk is more efficient.  We know what they would say.  Trading desks can execute baskets with a keystroke.  There are "fat finger" examples and also stories about interns sitting on keyboards.

Does anyone really think that a very complicated government report is generated in the same way?  Well the silly story was good enough to move the market last month.

Interpreting Housing Indicators

Finding the right economic indicators is a challenge for investors.  Often the same data are presented in several different ways.  How does one make the right choice?

Today's data on home prices from S&P Case-Shiller provides a useful example.  As everyone knows, prices are down significantly from peak values and the annual data have a strong seasonal component.  There are three quite different approaches.

Month-over month changes.  The 20-city home price index for April fell by 0.6% from March.  This decline was reported by some media sources, but ignores the seasonality in the data.  When the seasonal effect is strong, it can be quite misleading.

Year ago changes.  Most solve the seasonality problem by comparing the prices in April, 2009, to those in April of 2008.  Sources using this approach cited a price decline of 18.1%.  This ran as a headline on some stories and as a subtitle on CNBC.

The problem with these year-over-year changes is that it is difficult to see improvement fast enough to be helpful for investment decisions.  Let us illustrate this with an unlikely and extreme example.  Suppose that the index went up 10% from April to May.  The year-over-year value would still be a decline of 9.2%.

To avoid this problem, those using the year-over-year method compare the annual change in one month to that of another.  The conclusion often reached is that prices are declining at a lower rate.  This is not correct.  In the example given, prices would be increasing, not declining at a lower rate.  It is not easy to get real insight from a string of year-over-year numbers.

Seasonally adjusted data.  S&P also puts out a seasonally adjusted version of the series.  This allows the user to focus on the month to month change, the real time movement of greatest interest, while removing the regular seasonal pattern.  Using this approach, prices declined by 0.9%, worse than suggested by the other two methods.

Conclusion

Using seasonally adjusted data is frequently the best solution for this sort of problem.  Many of our fellow data consumers are suspicious of any adjustments to raw data.  They are then forced to make their own seat of the pants guesstimates about how important the changes are.

Calculated Risk, a favorite and featured source, also focuses on the seasonally adjusted data.  You can check out the latest update to this series, comparing it to the bank stress test assumptions, in this article.

ETF Update: Inverse ETF's and the Investor Toolbox

What role should ETF''s play in the investor toolbox?  Tadas Viskanta did a pretty thorough job of answering this question in a survey article last week.  Anyone interested in ETF investing should read the entire piece carefully.  It is very valuable.  (We are delighted to see this new dimension in articles from Abnormal Returns, one of our favorite sites).

The main arguments are that some ETF's are poorly designed.  Others (especially the leveraged long and leveraged short choices) are geared to short-term trading and do not deliver when evaluated over a long time.  The compounding of daily returns is not matched, because the fund rebalances to deliver short-term trading results.  Most investors do not understand this.

Many ETF investors do far worse than a buy-and-hold strategy.  Essentially, the ETF facilitates all of the worst psychological traits of the individual investor.

ETF investors need to understand these points.

We wish that Tadas had also covered the concept of intermediate term sector rotation  -- our own strategy, and also that of others.  Here are the key concepts:

1. Have a genuine system, not just market feel and hunches.
2. Test the system, because otherwise you will have no confidence.
3. Maintain discipline.  Accept short-term losses but control risk.

Our Approach

Our own approach meets all three of the key objectives.  We have a time frame of about one month.  This is not geared to day traders, and it also limits the trading costs of investors who want something more powerful than "buy and hold."  We consider Trends, Cyclical behavior, and we add a dash of Anticipation.  Since we do this with a universe of ETF's, we call it the TCA-ETF method.  We tested it on a universe of sectors not used by the developer.  We also reached into a different time frame.  This is the kind of testing that allows you to have some confidence in ultimate performance, so you are not second-guessing yourself every week.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

This Weeks' Spotlight

Each week we highlight the major moves in our rankings.  Most dramatically, we see the ascendancy of the index shorts.  While these short positions are partly covered by long sectors, the longs are not what we call "market" sectors.  They march to a different drummer.

The rankings for the inverse ETF's on the broad market -- SH, PSQ, and DOG -- reflect a negative outlook.  Our ranking list shows the rapid moves in these sectors.

Weekly TCA-ETF Rankings

Our weekly ratings go from Thursday to Thursday.  The performance (from Friday to Friday) lost about 3% as we transitioned to short positions.  The market had volatile and mixed trading, with rapid shifts from day to day.  This is the worst short-term combination for our system, and we lost ground to the S&P 500 which was down only slightly on the week.

We note the rise in health care sectors, and expect some mid-week buying in these groups.

Here is the chart for the most recent trades and current ratings as of Thursday's close:

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

A Crib Sheet for Government Data

Most sources -- even big-time media types -- provide no guidance about sources of information from the federal government.  There is a a useful advantage in knowing more.

We realize that there are many who reject any government information.  Here at "A Dash" we believe that this is an extreme viewpoint, and provides an opportunity for a trading advantage.

In particular, we distinguish between reporting data and offering projections.  Those rejecting the data reports are just fighting the mainstream interpretations accepted by nearly all economists and by the mutual fund managers.  Projections are quite different.  They come from different sources, and the results vary.

A Reader's Guide

Here are some typical examples of government information.  Our reaction varies dramatically and so should yours.

The Bureau of Labor Statistics (BLS).  This is a non-partisan agency.  The key professionals have tenure and earn respect from peers and supervisors by doing a good job.  A new President cannot fire them nor significantly affect their pay.  From their perspective, Presidents come and go but their work goes on.  They try to do a good job, and we think that they generally succeed.  The methods are subject to great debate before acceptance.  Once accepted, they are followed in a rather mechanical fashion.  Those suggesting that these reports are subject to partisan politics are just wrong.  They simply do not understand how government works.

The Office of Management and Budget is under the control of the current Administration, so it is partisan.  This does not mean that forecasts and comments are wrong, but consumers must consider the source.  At this time it means that forecasts reflect the Obama perspective.  Any forecasts should be carefully tested against outside sources.  For an illustration of how OMB can be slanted to a particular perspective, we recommend the Reagan era example of David Stockman.  In an interview he admitted a clear bias in forecasts and was "taken to the woodshed" by the President after he spilled the beans.  We are not suggesting that Obama is "cooking the books" with current forecasts, but we view them with appropriate skepticism, testing against other sources.  We plan to write much more about forecasts from the Administration.

The Congressional Budget Office is a source deserving respect.  We call this a bipartisan source, since it must earn and keep the respect of Congress, no matter which party is in power. Initiated in 1975 under the leadership of Alice Rivlin and later Rudolph Penner, the CBO analyses earned the respect of both parties in Congress.  Any young professional wanting to do objective policy analysis should see the CBO as a dream job.  In the current policy debates the CBO is responsible for evaluating every proposal.  This is especially crucial to the health care initiatives and the Congressional agreements concerning PAYGO, where there must be a revenue offset for new initiatives.  Here is a great current example.

Summary

The mainstream media does not explain these differences nor reflect them in reports.  A CNBC anchor recently kept referring to the CBO as the CBOE (an options exchange).  A top source at TheStreet.com recently attributed a CBO analysis to the GAO, even using the "old name" for the GAO.

They just don't get it.  The big-time sources do not distinguish between various government sources.  They do not provide any background or context.  They do not grasp the distinctions.

You can do better!  You can start by printing out this article and using it as a handy reference.

Summer of '09 -- A Crucial Time for the Investor

Investors face some important decisions.  For those approaching retirement it is a crucial time.

There is plenty of advice.  The television commercials, blogs, and email messages include a variety of appeals:

• Those telling you to buy an annuity to lock in your income, marketing to the fear of market losses, and perhaps playing down the death by a thousand cuts from inflation.
• Those telling you that you can do better than your financial advisor.  Go on your own!  You have a "feel" for the market.
• Those advising gold.  Everything is about to go wrong, so you need to have hard assets.
• Those offering speculative gains.  Here are some stock ideas that are "home-run" ideas, where you can triple your money in a couple of months.  Often these are penny stocks.

Any of these strategies could be right --- as a part of an overall plan.  For those with adequate resources for retirement, a defensive posture might be correct.  Some investors might be willing to learn what they need to know and execute with discipline.  Inflation protection will play a role at some point.  Some speculative ideas will work, but most will not.

It is a minefield.  You need a plan.  Here is a nice article asking a key question about when you should plan to retire.

You also need to know how to interpret data and modify the plan as the evidence changes.  Many of the sources of information are selling something -- annuities, brokerage services, gold, or complex structured products that play upon investor fear.  In a typically excellent article, David Merkel writes as follows:

I have three bits of advice for readers.  First, don’t buy any financial instruments tht you don’t understand well. This especially applies when the party selling them to you has options that they can exercise against you.  Wall Street excels at products that give with the right hand and take with the left, so beware structured products sold to retail investors.

Read the entire article for some additional helpful advice.

Our Approach

Every investor has a different problem and requires a specific plan.  All face the same challenge, but individual needs, goals, and risk tolerance vary widely.

We must interpret a recession that does not fit the prior molds very well.  The causes were complex with many interactions.  The attempted solutions are also complex.  It is not a cookie cutter where we can say it will all play out like some prior year.

Many make predictions with great confidence, often drawing more from their political opinions than economic evidence.

At "A Dash" we are seeking objective economic indicators with proven value.  No one knows how it will all play out, so it is a week-by-week process.  The answer will come from a combination of interpreting economic data in a dispassionate manner and recognizing the effect of public policy initiatives.

The Investor Challenge

Any investor navigating the minefield must do three things, all major themes at "A Dash":

1. Overcome the psychological pull identified in the behavior finance literature.  These are the reasons that most investors significantly lag market averages.
2. Monitor economic data in an objective fashion, getting past both the "green shoots" crowd and those who always find the worst take on any information.
3. Put politics aside, figuring out how to make investment returns no matter which party is in power.

In an effort to help investors with these points we suggested a little quiz.  Apparently we did not present the problem effectively, since our fine editors at Seeking Alpha did not see the significance of the questions.  We know from our classroom days that everyone hates quizzes, especially when they do not know the answers!

Perhaps we should have stated it more strongly.  Anyone who cannot do well on the quiz, and we strongly believe most would fail, will be out of touch with the economy and the market over the next few months.  They will also make psychological mistakes that will lead to failure.

We were alarmed that our smart neighbors had so many ideas -- most of them wrong -- and were all acting decisively on their opinions.

Over the next two weeks we will reveal the answers to the questions -- each of which was carefully chosen to reflect an important issue.

We could have just written an article about "The Eight Big Mistakes You are about to Make."

Our experience in education tells us that people learn more when they try to answer a question themselves before getting the answer.  It is a tried-and-true technique.  We urge readers to take a look at the quiz and make some private notes of the answers, even if they do not choose to enter the contest.  Official entries for our prize will close on Thursday.

As we explain each answer, the significance of the questions will become clear.

And finally, while our focus is on the individual investor, most of the concepts are equally important for traders.

Timing the Trade in "Obama Stocks"

The insatiable hunger for stories motivates financial media.  At the first hint of a new development the process begins -- hard news, analysis, critics, and long-term effects.  The cycle is so fast that we sometimes get the criticism before most have digested the original news.

This is the nature of a highly competitive news environment where everyone wants to get a scoop.  It is completely understandable both for mainstream media and for bloggers who all want to weigh in on the story of the day.

Is this a useful time frame for market participants?

For traders, the answer might be "yes."  There will be opinions and reactions.  Anyone who can "game" the market reaction may make a point or two in trading profits.

For investors, we believe the answer is "no."  The initial, knee-jerk reaction may have nothing to do with the actual investment potential.  Let us consider a current example.

The Obama Health Care Trade

Understanding public policy can provide a real advantage in predicting policy outcomes.  Since that is the starting point, let us review what we expected about Obama and health policy.

1. We understood the difference between campaign issues and actual policy.  There are many steps and many compromises.
2. We noted the early reluctance of Congressional Democrats to get on board with Obama health initiatives.
3. We have been skeptical about the ability to put together the coalition necessary for a "big" health policy bill.
4. There is growing attention to future budget deficits.

These conclusions would not be surprising for anyone who has studied Congress and health policy.  In our case, we have done it  since the days of Wilbur Mills, but analysts with less experience might easily reach the same conclusion.

Contrasting the Media Time Frame

Media needs relate to the story of the day.  If President Obama is giving a speech on health policy in Green Bay, Wisconsin (a wonderful town!) then that is the media story of the day.  The Fast Money gang brings on their go-to guy, Dan Clifton, and asks what stocks will be affected by the Obama plan.  Clifton, whom we respect and cite frequently on our sister site Election Stocks, gave exactly the answer we would have given -- as the question was posed.    He was invited to comment, and he answered the questions from the gang.

The problem is the context.  We would have emphasized that many of these changes were unlikely.  In particular, the health insurance companies will do well if the final plan generates more customers, a result we see as likely.  Briefly put, anyone following the media take would have been an instant loser.  The insurance stocks rallied ten percent as news of opposition emerged.  Anyone looking at the actual politics can see the potential for these companies.  (We are analyzing and shopping for our clients.  There is plenty of potential.)

Conclusion

The health policy issues are one of many initiatives where investors can score some big gains.  It is a complex political situation, and it will change during the summer.  There is no official Obama plan.  It is not easy to follow, and that is the source of the opportunity.

Cost control seems to be a part of any proposal, and that weighs on existing pharma, new products.  and aspiring pharma (biotech).

This is a minefield for the media and for casual observers.  It is an opportunity for anyone following the nuances of the politics, picking the right time to get involved.

Obviously, this story has many more twists and turns.  Finding the right time to play is crucial.  The major media time frame is quite wrong, and provides an opportunity for long-term investors.

There are numerous other policy issues, all of which we are tracking closely.

ETF Update: Sectors Reflect a Deteriorating Market

At "A Dash" we believe that there is always a bull market somewhere.  Jim Cramer has made the statement famous, but it has always been the guiding concept for those following a sector rotation strategy.

Our own approach to finding the current bull market includes studying recent Trends, an established market principle, as well as identifying Cyclical behavior.  To stay a step ahead of the crowd, we use somewhat "faster filters" to add Anticipation to the mix.  We apply this to a universe of ETF's representing many important sectors, resulting in our TCA-ETF approach.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

This Week's Lesson

Each week we expect the model to provide a lesson about the market as well as a suggestion of what to buy.

Market.  The big story of the week is the rapid deterioration in the market.  According to our ETF rankings, the modest decline in the broad averages understates the breadth of the weakness.

Fresh Money.  The weak conditions suggest caution, and we have cut back on position sizes.  Those with new money to invest might look to utilities.

Focus on Utilities

We play the utilities via the iShares Dow Jones U.S. Utilities Sector Index Fund (IDU).  This is not very concentrated, with the top five holdings covering only about 30% and the top ten under 50% of the entire investment.  The P/E ratio is about 12.5, but here are the key metrics:

Beta:  .52
Yield:  4/3%.

It shows what the market seeks at this juncture.  Here is the chart.  To those of us who, like Art Cashin, are "cocktail napkin" analysts, this does not seem very exciting.

We own the sector, but it looks to us like there is plenty of work to do around the 70 mark. The model has a weak but positive signal.

Other Commentary

The ETF punditry is paying little attention to utilities.  Tom Lydon has a nice article on the new emphasis on nuclear energy.  He mentions IDU, and a couple of the companies in the group.

We think the main source of recent strength has more to do with a general defensive posture and a renewed emphasis on yield.  The market is showing skepticism about the prospects for near-term capital appreciation.

Weekly TCA-ETF Rankings

With only 11 of our 57 sectors are in the "buy" range, we have a very weak overall picture.  All of the broad market ETF'S are in the penalty box.

We were down over 5% on the week, losing 2.5% to our benchmark, the S&P 500.  While the ratings below show the model signals, we are actually even more conservative, about 50% invested.  (Friday's ratings were even weaker than those listed below).  We always hate to lag the market, of course, but the model has kept us invested for a pretty good overall run.  There were plenty who missed the entire move, calling it a "sucker's rally."  Paying attention to your system is important.

Based upon the model signals, we shifted to a neutral position in the Ticker Sense Blogger Sentiment poll.  This means that there is little we find attractive, but not a strong risk/reward case for going short.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

Summer Quiz

Some neighbors had a block party last night.  Our neighborhood has many intelligent people.  While there is plenty of diversity in race and religion, there are many shared values about kids and community.

Nearly everyone is a successful professional person.  There were plenty of opinions about the economy and the current investing climate.  Partly (but not entirely) from this experience, here are a few questions.

1. We have an honest coin which we flip 20,000 times.  We keep a running count of whether heads or tails is in the lead.  How many lead changes would you expect?  (A good ballpark answer could be the winner here).
2. The M1 and M2 measures of money supply have increased dramatically this year, in response to the Obama budget and stimulus spending. (True or False)
3. The number of "jobs created" last month was negative.  Over 300,000 jobs were lost, and this number was skewed by imaginary jobs from something called the "birth death model."  How many jobs were really created?
4. The Fed balance sheet has ballooned since Obama took office. (True or False)
5. You get the chance to be on a game show.  The host lets you pick one of three doors for a prize.  One door has a great prize and the others have trivial rewards.  You make your pick.  The host (who knows where the real prize is) reveals one of the two alternatives and offers you the chance to switch your choice.  Should you do so?
6. The percentage of those currently unemployed rivals the figures from the Great Depression.  (True or False).
7. The government stress tests for financial institutions have something called an "adverse scenario."  The conditions from that scenario have already been met, or nearly so.  (True or False)
8. From the peak, how much have personal consumption expenditures declined?

If you think you are smart and knowledgeable, send us an entry at falin at newarc dot com.  We will give a nice prize and some recognition to the winning entry.  We have a couple of days of travel, so you have some time to submit your answers.

ETF Update: Transports Challenge the (double?) Top

Some market analysts are "bottoms-up."   They pick stocks whatever the market.  Others are "top-down", starting with broad macro themes.  Both approaches can lead to winning results, but there is another helpful perspective:  Market Sectors.

The changing behavior of market sectors helps to reveal broad themes and opportunities.  Our system for doing this reflects the Trend, considers the Cycle, and adds a bit of Anticipation.  Since we look at a universe of ETF's, we call it the TCA-ETF model.  (The complete current rankings are at the end of the article, along with an explanation of our methodology).

Weekly Market Overview

The sector approach is especially good for getting perspective at the start of a new week.  This week there are three interesting themes.

First, the weak dollar plays now show a mixed picture.  Energy has gotten weaker, and gold dropped rapidly in the rankings.

Second, there is more strength and diversity at the top.  There is greater strength in technology and in all of the broad market ETF's.

Third, the big ratings move for the week came from transportation, this week's featured sector.

Spotlight on the Transports

We track and trade the transportation sector via the iShares Dow Jones Transportation Average Index Fund (IYT.  It is pretty concentrated with 43% of the fund in the top five stocks and over 2/3 in the top ten.  The P/E is about 17 and the beta about 1.2.  Those numbers are pretty high if you think the economy is going much lower, or pretty low if you think we are near the bottom of the economic cycle.

The fund emphasizes railroads, package delivery, and trucking.  Airlines are included, but make up only 4% of the holdings.

Let us start by looking at the chart, since some of the pundits have a technical opinion.  For those of us from the Art Cashin school of "cocktail napkin" technical analysis, it appears that the group is doing a good job of fighting resistance at the 60 level.  The initial risk looks like 53 or so.  The initial reward is more difficult to determine.

Expert Commentary

Each week we search the top sources on ETF commentary to see if anyone else is highlighting our featured sector.  We also augment this by looking for information on the underlying themes and specific stocks.

This week, the results are pretty thin, suggesting that few are interested in this group.  Let us look more closely.

The prolific David Fry mentions IYT in his Friday outlook.  He sees a mixed picture, but you should look at his typically nice chart and specific commentary.

The Trading Goddess wants to see a breakout before buying.

From the macro perspective, Barry Ritholtz reminds us that truck tonnage is down.  He sees no "green shoots" in the transports.

The biggest negative comes from technical analysts like Bonddad who see a double top.

Our Take

As contrarian investors, we always find it interesting when our trend-following method finds a sector that other pundits do not seem to like.

We also note that many analysts are too quick to conclude that rising fuel costs are bad for the entire group.  Many trucking companies can pass on fuel price increases.  The package companies do so with a delay.  The railroads are advertising fuel efficiency.  The airlines make up only a small portion of the group.

It is possible that the easy conventional wisdom about fuel and transports has concealed an interesting opportunity.

We are in the sector, but regular readers know that this can change quickly.

Weekly TCA-ETF Rankings

With 44 of our 57 sectors are in the "buy" range, we have a strong overall picture.  We also have positive ratings for all of the broad market ETF'S.

We were up slightly on the week, with no major change versus the S&P 500.  We like the additional diversity in our current position.

Based upon the model signals, we continued our bullish position in the Ticker Sense Blogger Sentiment poll.

Note for New Readers

Our weekly ETF Update is designed to assist both investors and traders interested in ETF's and Sector Rotation.  Before turning to the current rankings, let us undertake a review for readers new to this series.

Our Method.  In this past article, we described our basic methodology and why we believe the rankings are useful for fundamental traders and technical traders alike.  While we urge readers to check out the entire article, the key point is that ETF's pose challenges and opportunities different from investment in individual stocks.  The fundamentals may be more difficult to assess.  Even with a good grasp on fundamental trends, there is a lot of technically-based trading in ETF's.  This means that those trading with a fundamental approach (and we do this as well) want to monitor the "hot money" moves.  Here is an article on that point.

The system synopsis. We look at Trending sectors, Cyclical Sectors, and build in an element of Anticipation for both entry and exit -- thus the name of the model, TCA-ETF.  While we do not reveal the exact methodology for spotting trends and cycles, the system is not a "black box."  The basic elements are used by many, and widely reported.  We even discuss the need for human analysis as opposed to black box trading.

We report the rankings each week, now on the weekend with a one-day delay, using the Thursday output from the model.  We monitor and trade this daily, and offer a free report (request via the email address on the top left of the site) for those interested in our weekly trading program.

How to Profit from the Obama Stocks

Understanding public policy decisions is crucial to investment success.

This has never been more true.  Government intervention is changing the nature of every business.  As an investor, you need to figure out what is going to happen, and whether it affects the companies in which you own stock.

Over the last several days we have emphasized how easy it is to make mistakes in the minefield of politics.

• You can misunderstand the difference between politically controlled agencies and the civil service.  We will explain how to tell the difference.
• You can confuse your role as citizen with your desire to make money as an investor.
• You can ignore good sources of information, just because you disagree with their politics.

We have some more mistakes to highlight in this series, but there is a positive side.  We strongly encourage readers wanting to follow this approach to review the links above.

We are going to show how to figure out where to get information, and how to use it.  Part of our success in client portfolios relates to a disciplined approach to public policy analysis:

We want to succeed no matter who is in power.  We put personal opinions aside.  We analyze the likely results, and figure out which stocks will gain.

It sounds simple, but hardly anyone can resist the temptation to confuse opinion with analysis.  Most of the current pundits are offering opinions about politics at the very time that stimulus dollars are starting to hit.  This is good for their ratings, but bad for your portfolio.

They jumped the gun months ago picking "Obama stocks" on his inauguration.  The earnings effects have yet to show.  Meanwhile, companies have gotten lean and mean.  Many are showing reasonable earnings even in a time of economic distress.  Let us find these winning stocks.

As background, here is a recent article we wrote for TheStreet.com's RealMoney site.  It is a bit  introspective, but regular readers of "A Dash" may find it useful.

From RealMoney.com, 4/30/2009

When I started writing for RealMoney, I had an idea: I wanted to study how the nexus of politics, public policy and specific stocks could provide a big edge to readers. Almost two years ago, I launched a Web site, ElectionStocks.com, and hired some staff support. Since I watch political news and the markets for most of the day, I feed ideas to the team; I also write some pieces and review the work.  We started by covering about 20 candidates from both parties. We identified issues and stocks for each of them. As the field narrowed, we focused on stocks that could work regardless of who was elected. I was looking for names I could suggest as good stocks with great potential political drivers.

The Best Advice?

Sometimes the best advice is a warning against any particular action. We had no precedent for an election and transition in the middle of an economic crisis. Many analysts and researchers were going on TV with their "Obama stocks" at the time of the election, at the start of the year and on the day of the Inauguration -- the election cycle offered three chances for publicity.

The cold reality? This time was really different. Even when the election results were certain, no one could know which of the Obama proposals would survive in the Senate, nor how quickly they would be passed. More important, a single issue dominated all others: dealing with the "toxic" assets. The new administration did not seem to understand that this was the keystone for all problems. The first approach to the problem of price discovery was Treasury Secretary Tim Geithner's maiden voyage ... and a stock market disaster.

The biggest Obama mistake has been the failure to deal with this problem; no one on the team appreciated the significance. The result? We are getting the announcement about the particulars of the Public-Private Investment Program on May 15, more than six months after the election; Hank Paulson went to Congress in September. This will go down in history as one of the worst responses to a financial crisis, partly caused by the transition in administrations.

Simply put, this was not a time to buy stocks because of the winning candidate's positions. Those who did so had big losses, because the general economic questions overwhelmed any specific stock ideas.

I've been watching elections for 40 years and studying how the election cycle affects stocks for more than 20 years -- I taught political science and public policy for 13 years before entering the investment business in 1987. I also devoted particular focus to this cycle -- I'm confident that I'm among the most qualified analysts on the subject -- and still I refrained from pushing the investment ideas our team developed.

It was not right, and I knew it.

How to Make Money

Part of investment success is avoiding losses. I hope that readers of my commentary on Obama policies have shared my caution. When the stimulus package was passed, we identified some stocks that would benefit. As is often the case, the problem was the time lag. While the market attempts to look ahead, there are very few experts on government spending. It is very complicated. I follow everything said about Obama and stocks and filter the prospects through almost 40 years of training and experience. Here is my general conclusion:

• Initiating new policies is more difficult than you think -- much more difficult. Be skeptical.
• I always look for the "default policy" -- what will happen if nothing changes in the law.

Now Is the Time

It may seem silly to some, but now -- 100 days into the administration -- is the correct time to start thinking about Obama stocks. Here's my reasoning:

• The stimulus package was widely dismissed by market pundit, mostly because it did not do what they preferred. The actual spending is starting to hit, and will show up in corporate earnings.
• The budget process is prolonged. The Street hated the proposals as "too liberal." We are now about to learn -- for the first time -- what will really get passed. It is time to pay attention.
• We are getting policy details. People do not realize how long it takes to make a transition. The new secretary of Health and Human Services was approved just yesterday; how could we project health policy before this? The Specter party switch also affects prospects, especially for every health stock.

Unless you are monitoring factors like these, you are out of step with reality.

What to Buy

Over the next few weeks I plan to highlight several different groups of stocks, each of which may benefit from Obama policies. I will downplay those where I think congressional prospects are poor and emphasize those where prospects are good.

Meanwhile, my team has constructed a stimulus package portfolio. We have carefully monitored opinions from a wide range of experts featured on financial media. (RealMoney's own James Altucher's ideas are prominent in the portfolio.) The portfolio has had a positive result, but the results are nothing special so far. That's good -- most people bought the Obama stocks too early, got discouraged, and bailed out. This relative loneliness in the space provides a good opportunity.

Here is a preview of our coming articles:

• Health care: Information technology stocks will definitely do well. Other health stocks depend upon the yet-unknown details of the plans. Look at Athenahealth (ATHN) 
• Alternative energy: We like First Solar (FSLR) , and it is part of the portfolio. A number of other good choices (courtesy of James A.) are also included. 
• Infrastructure: There are several choices in this space -- check out KBR (KBR) . 
• Defense stocks: This is a surprise to many who see Obama as cutting defense, but cutting the costs for Iraq may not translate into lower returns for specific contractors. We see good prospects for many defense holdings. Jim Cramer also is noting this strength on earnings calls.

It is hard to believe. I would not have predicted it in advance. The best time to buy the Obama stocks is after the first 100 days. Stay tuned for more specific picks and how you can use Obama's policies as you craft your portfolio.