BigTrends

It’s time for another ETF trend summary  and this time for July (oh how time flies)… Major indices posted the first monthly gain since April of this year led primarily by industrials (XLI) and energy (XLE). After a two month hiatus from gains we saw just about all prevailing trends reverse during July. As it stands for the close of July the market is marginally down year to date with Small Caps (IWM) posting the best index performance up nearly 5% thus far.

Take a look at the ETF heat maps below – we’re looking at July performance alone and YTD of some of the most prominent ETFs. As you can see the one month heatmap is painted in green, while the YTD is just about unchanged with exception to the extreme underperformers and extreme outperformers. As usual the brightest blocks are usually leveraged ETFs.

US Sector ETFs

* Materials led the way in US sectors growth with oil servicers not far behind. Other notable leaders include transportation and industrials.
* Healthcare (XLV) was a dead weight pulling down pharmaceuticals (PPH) as well.

Commodity ETFs

* The super star in commodities is no longer Gold, but all things agriculture (DBA). The outlier is Sugar (SGG) up nearly 23% in one month. In addition, growth dependent metals like, Copper (JJC) and Aluminum (JJU) recovered
* Perhaps the biggest, most useful news took place in oil.  Oil (USO) gained ground for a second month and looks to be headed to the top of its monthly range. The price pattern looks supportive of USO gaining 15% or more over the next 2-3 months.

Currency ETFs

* Around the world the top performing currency of all the majors was the Australian dollar (FXA) while the US Dollar performed as one of the worst.
* To date the Japanese Yen (FXY) is best performer for 2010

International ETFs

* As others have pointed out, Latin America is en fuego right now and some of the best performers in the world are Brazil (EWZ, BRF) and all of Latin America (ILF)
* Not all BRIC countries are participating. China (FXI) was underperformed the US (SPY) in July while India (EPI) failed to participate in the rebound at all.

ETF HEATMAP (July Performance) –


ETF HEATMAP (YTD Performance)

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As we all know Global indices took a nose dive in May and the short-term bottom finally took hold May 25, roughly one month ago. Since the mild recovery the Vanguard Global Index ETF (VGK) has gained 12% and the SPDR S&P500 6.7%.  Both are solid moves in under a month but overall the S&P500 is lagging emerging markets. Even with a surprise change in currency policy (and a surge in equities) China has underperformed its BRIC peers like Russia (RSX), Brazil (EWZ) and India (EPI). 

The true leader of the global rebound is Latin America. There are 20 countries that comprise Latin America, most of which are not revered for their economic prowess, however, a broad based trend has emerged giving this area the leg up in recent market performance. Let’s take a look at the ETF leaders:

In the chart below we have the top 20 ETFs sorted by 1 month performance – to keep it true we do not include inverse or leveraged ETFs. 30% of the top ETF performers are Latin American ETFs providing the largest chunk of gains of any geographic location. Interesting enough another strong geo-location is South East Asia & Australia with Indonesia (EWA), Australia (EWA) and Thailand (THD) with 15% share of the top 20.

Brazil is the clear leader of leaders with two ETFs in the top 5 performers including Small-Caps (BRF) and large-caps (EWZ). (In case you cannot decide on BRF or EWZ, a new Brazil Mid-Cap ETF started trading on Tuesday with ticker BRAZ.) Next are two diversified Latin American ETFs, GML and ILF – both are heavily invested in the top economies Brazil, Mexico and Chile. Chile (ECH) and Mexico (EWW) round out the list of top performers.

Given the dependence on energy and basic materials in these economies it’s no surprise to see the Coal and Steel ETF make an appearance, although Oil remains out of the picture. If the trend continues and leaders continue to lead (which they tend to do) then we could see oil (USO) outperform over the next month closing the performance gap.

Click to Enlarge

In the past 14 days the S&P500 has shed 7% of its value so many investors are starting to look for value in beaten down equities. Of course, others still believe this is the start of a new bear trend… In either case, here’s a list of the most overbought and oversold ETFs.

Yesterday I received the following documents from one of my brokers and since I only received it from one there's a good chance you have not seen it yet.

For those of you that trade Leveraged ETFs like Direxion's 3X Bull/Bear ETFs or ProShares UltraShorts effective April 30 FINRA has raised the margin requirements needed for trading on margin. This was announced several months ago, but now it's happening and in my view, it's a move in the right direction. Don't forget there's a class action suit being filed against broker-dealers (IAI) regarding the misrepresentation of leveraged ETFs.

Since the market volatility spiked to all time highs in 2008 traders and investors alike witnessed the power of these leveraged vehicles. It displayed option-like opportunity with stock 'security' that investors perceived to be less risky, which is not generally correct. In short, leveraged ETFs have become a rookie magnet in trading (I suppose the recent bull market has made them all geniuses). Bottom line, whether you are a seasoned trader or just beginning it's important to know everything about your trading vehicle of choice.

That said, if you're trading leveraged funds I recommend the following:

• Max holding period of 1 week (many would say 1 day)
• Focus on 60 minute charts our less (I prefer 60 & 15)
• Execute a time stop - leveraged traders need velocity - in other words, if the ETF is not moving exit in a specified period of bars
• Focus on core group of Leveraged ETFs: If you're trading options your list will be different than the stock trade based on the current price [define your list]

The currency markets are in turmoil this morning as Greece is bailed out.  As expected the Euro is facing increased selling pressure and is currently off 1%, which places it near 10 month lows.  In contrast, the US Dollar has achieved a quid pro quo and is up 1% on the news and is near 9 month highs.  

Today's impact is significant on both currencies -- It looks like the US Dollar Index ETF (UUP) is breaking out based on recent price action.  In testing those 9 month highs UUP has moved well above its 50 day moving average while the same moving average has now crossed and confirmed above the 200 day moving average.  As of now, the up trending channel shows resistance at $24.25 on UUP, perhaps this is the target for many long USD traders. 

If nothing else, we'll see commodities, like oil (USO) and gold (GLD) fall on the strength of the US Dollar.  

PowerShares US Dollar Index Bullish (Prefer inverse ETFs? UDN is $ Bearish Index) – Click to Enlarge

Overall February's ETF Trend was more bullish than January's with all three major index ETFs gaining ground. Here are the quick take-aways from February:

--In contrast to January Asian markets experienced the heavier selling in February with Japan and Taiwan leading the weakness.

--January's standout was Regional Banks and February is no different with strength spreading to all financial another month of gains (XLF, RKH, KRE)

--Energy and Commodity Based ETFs continued to show major weakness with XLE, XOP, OIH, UNG and SLV all showing losses.

--If any leaders emerge in Energy and Commodities look towards Gold and Oil as GLD and USO were a couple of the bright spots.

--With International and Global ETFs closing decisively bearish for a second month we'll be watching if they lead major US indices lower. 

--The strongest US sector is consumer discretionary led by retailers (XRT)

Let me know if you see anything else in the comments below!

ETF Heatmap (1 Month Performance) - Click to Enlarge

The relationships between the US Dollar, Gold, the Stock Market, and Bonds is a complex, inter-related one that changes over time.  However, there are noticeable trends and "push/pulls" that one can spot in a price performance chart.

Take a look at this following chart of the PowerShares US Dollar Index (UUP) and the SPDR Gold Trust (GLD):



What you can see clearly here is that the down move in the Dollar that began in late-2008 was in tandem with a big rise in Gold.  The Gold move peaked in early December of last year.  Since that time, the Dollar (represented by the UUP) has been on a steady uptrend versus its basket of world currencies (Euro, Yen, Pound, Canadian Dollar, Krona, Franc).  Meanwhile, GLD is heading lower.

The simple conclusion I draw from this chart is that continued strength in the UUP/Dollar will lead to further downside in GLD/Gold.  The relationship between the US Stock Market and the Dollar is not as strong currently in my analysis.

You may well think that the Dollar will eventually resume its downward slide, and Gold will have another big upleg.  But "don't fight the tape" as Jesse Livermore would say -- and currently the UUP is showing strong technicals.

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Take a look at the ETF heat map below - we're looking at January performance (or YTD) so this gives you a solid idea of the winners and losers so far in 2010. I suspect there is a positive correlation between the overall market and individual sectors with respect to the January Barometer. That said, we may be looking at the strongest and weakest sectors of the year.

Here's what I see (sound off in the comments below if you notice anything else!): (Click to enlarge pic)

• 90% of World Market Are Negative (Majority of Green are Short/Inverse ETFs)
• The Worst Performing Group Looks Like Basic Materials (XLB, GDX, XME, SLX)
• The BEST Performing Group is REGIONAL BANKS (KRE, RKH, IAT)
• Other Notable OUTPERFORMERS Include Japan (EWJ), Homebuilders (XHB), Russia (RSX), Global Shipping (SEA)

ETF HEATMAP (Close of January 2010/YTD) From FinViz

It's that time of year again when investors start adjusting the rear-view [investment] mirror as they look forward to a new year of money making trends. It's a good time to peruse the free analysis available, all-the-way from the top investment banks down to your local advisor, but be selective and filter out the noise because a lot can be misleading or incorrect.

That said, I found this handy little document called, Goldman Sachs Global Viewpoint - Top Trade Ideas for 2010, which covers Goldman's (GS) top 8 trade ideas for 2010. In my view, it's well worth the time to scroll through the short 7 page analysis, there are some ideas that I agree with - for example, Trade #2 is LONG RUSSIA Equities (RSX), this points towards the strength in BRIC countries (BTW, Goldman coined that acronym back in 2001), however, I would expect Brazil (EWZ) to be a larger beneficiary of BRIC investments next year. I'll be covering the details of Brazil in BigTrends 2010 Outlook due out next week (sign up for a free BigTrends Insider account to receive)

Tell us what you think about these trade ideas below, I'm especially interested in the 12 month volatility play...

It looks like traders are still digesting Friday's job news as the market is in a holding pattern with major indices mixed. Gold continued to move in big ways and oil may be breaking out of it's recent bear trend (Are Gold and Oil set to revert back to their means? GLD / USO Pair Trade??)

Check out this 5 minute video on GLD, OIL, and UUP and let me know what you think