Market Correction Looming?

Today the S&P 500 (SPY) is flirting with new highs, based on our research this price action is to continue and should cause the index to close at a brand new high for the year. The technical picture looks bleak. For the last month, the market has continued its rally on lower than average volume. Fundamentally, the facts show that although there are signs of improvement in the economy, the full extent of the recent rally is unjustified. The consumer will continue to be a drag on the economy. The average consumer is still in a deleveraging/saving frame of mind and does not have a strong appetite for new credit to finance larger purchases. With unemployment continuing to be a threat, and consumers racing to either save or pay down debt, our view of economic growth seems to be temporarily constrained. A good percentage of this year’s market rally can be justified fundamentally, relative to the desperately oversold levels we were in during February. Most companies have cut costs which in turn, has increased profitability, but the real question, and what we believe will hinder positive results this coming earnings season is top line growth. After all the major cost cutting efforts that occurred throughout the recession, companies are poised to meet and possibly beat expectations on the bottom line. Our focus this earnings season is on new revenue. If companies don’t improve the top line it only shows that any good result is a function of cost cutting efforts that simply will not be sustainable in the long term.

We expect to see a near term shortfall in the market in the range of up to 10%. A way to hedge your portfolio or make a play on this information, would be to short the S&P 500 (SPY) or put on a contrarian position on the temporarily media, and investor hated US Dollar (UUP). Going long the US Dollar (UUP) would temporarily hedge you against a market shortfall because it has been trading inversely to S&P 500 (SPY). Our long term view on the US Dollar is bearish for obvious reasons, but in the near term a short term rally in the US Dollar(UUP) is rather probable. The chart below shows a comparison between the recovery periods. The 1974-75 upswing vs. this year’s market rally. If you notice, there are many similarities between both time periods. When we started comparing both upswing back in August we used it’s .93 correlation to project the future moves of the S&P 500 (SPY). As of now it has been fairly accurate and following its course. If this analysis holds true, there is a slight pullback on the horizon.

Solar ETF Update: TAN vs. KWT

Over a year ago we took a look at the two most popular solar ETFs, Claymore’s Global Solar Energy Index (TAN) and Van Eck’s Market Vectors Solar Energy ETF (KWT). At first glance these two funds look to be quite similar, and in many aspects they are. However, a closer look reveals many of their differences in structure, size, and value.

The first solar energy ETF to hit the market was Claymore’s TAN, which tracks the MAC Global Solar Energy Index. This index has grown from 25 securities a year ago, to 30 today. The market cap size over the past year has drifted lower to small (51%), mid (38%), and large cap (11%) companies. Shortly after the launch of TAN, Van Eck’s KWT hit the market, which tracks the Ardour Solar Energy Index. This index is comprised of 29 securities, up from 27 a year ago, covering small (38%), mid (53%), and large cap (9%) companies. When looking at the top five holdings of the two funds as a percentage of the total fund, TAN’s top five have dropped from 34% to 25%, whereas KWT’s top five has dropped from 47% to 31% of the fund. Also worth noting is MEMC Electronic Materials (WFR) was previously absent from KWT, but is now the fund’s third largest holding.

On a value comparison, TAN’s average trailing P/E ratio is around 13, while KWT is sporting a 14 trailing P/E. When looking at the top three in country allocation, TAN is 30% China, 30% United States, and 27% Germany compared to KWT’s 35% United States, 27% Germany, and 27% China.

Over the past year both of these ETFs have shifted to a smaller average market cap, and have seen their P/E ratios drop significantly. Although KWT has become more diversified, Claymore’s TAN still seems to be the better choice.

PIMCO Battles iShares for Treasuries

The new PIMCO 1-3 Year US Treasury ETF (TUZ) has been trading for two days now, as the bond giant’s first stab at the ETF market. The 1-3 Year U.S. Treasury Index Fund is a passively managed exchange-traded fund comprising primarily the high-quality component securities of the Merrill Lynch 1-3 Year U.S. Treasury Index. Management fees are listed at 15 basis points, which is the same as its primary competitor, the $7 billion iShares Barclays 1-3 Year Treasury Bond Fund (SHY). Given PIMCO’s position in the bond community, it shouldn’t be too hard to chip away at the mammoth iShares fund over time.

XRO Sheds Energy & Tech for Finance & Medical

The Claymore/Zacks Sector Rotation ETF (XRO) recently rebalanced the fund’s holdings, on April 2^nd.  The ETF is based on the Zacks Sector Rotation Index, which uses a quantitative methodology to overweight sectors with “potentially superior risk-return profiles”.  The sector allocation is done on a quarterly basis.

In the most recent rebalancing, there was a shift away from Technology and Computers, and Energy, and new allocations in the Finance and Medical sectors.  Allocations have also been also been increased in Retail/Wholesale, and reduced in Business Services, Industrial Products, and Aerospace.  Listed below are the current allocations of the fund, and the increase or decrease compared to the last rebalancing that took play on January 5^th.

Medical:  36.3%, up from 0%

Retail/Wholesale:  32.1%, up from 18.6%

Finance:  11.6%, up from 0%

Business Services:  7.9%, down from 13.5%

Consumer Discretionary:  6.0%, up from 5.4%

Industrial Products:  5.0%, down from 7.8%

Aerospace:  0.7%, down from 5.8%

Consumer Staples:  0.3%, up from 0%

Autos/Trucks:  0%, down from 0.5%

Basic Materials:  0%, down from 5.1%

Computer & Technology: 0%, down from 25%

Construction:  0%, unchanged

Conglomerates:  0%, unchanged

Energy:  0%, down from 10.4%

Transportation:  0%, down from 7.9%

Utilities:  0%, unchanged.

The fund is currently comprised of 100 companies, and has a price to earnings ratio of 13.0.  The fee structure is capped at 60 basis points, and currently has total managed assets of around $28.8 million trading on the NYSE Arca exchange.

XLF Breaks Resistance on High Volume

Financials surged Thursday on results from Wells Fargo (WFC) that were better than expected, sending the whole sector higher. The financial ETF (XLF) broke through previous resistance levels, on the heaviest volume in 10 sessions. Wells Fargo finished the day up more than 31%, Bank of America (BAC) closed up 35%, and Citigroup (C) closed up 12%.

Barclays (BCS) announced the sale of its iShares unit to CVC Capital Partners, a private equity group for $4.4 billion.

Two ETFs for International Treasuries

In recent weeks, there hasn’t been a hotter market than fixed income, most notably treasuries. So it’s no surprise that the two newest product launches from Barclays’ iShares are both international treasury ETFs. The two new funds, the S&P/Citigroup International Treasury Fund (IGOV) and the S&P/Citigroup 1-3 Year International Treasury Bond Fund (ISHG) began trading in late January, with very light volume.

As expected, all of characteristics of these two funds, except for the average maturity are almost identical. The country allocation for both of the funds are very similar with exposure of 25% to Japan, 10% to Germany, 8% to Italy, and 7% to France. The credit rating exposures for both funds are 53% AAA, 5% AA+, and 25% AA. As for the expense ratios for these new ETFs, they are both listed at 35 basis points.

For more information visit http://www.etfplanet.com