Have you ever picked a daisy, pulled out the pedals one at a time, “She/he loves, she/he loves me not?” You remember how hopeful you were that the last pedal between the fingers fell on loves me?
It sure seems like Wall Street is using a similar strategy. One day the European debt default pedal is pulled – stocks down 180 points at the open. The next day, no-no, the we have a solution pedal is in hand, gap up 300 at the bell.
Let there be no doubt, banks, governments, brokers, insurance companies… are all Tebowing, hoping and praying that the last Euro pedal standing is on she/he loves me’s pluck.
The whimsical trading has left investors dizzy from volatility. Even old-time pros are struggling to stay in business, and some are searching for $1.2 billion of clients’ funds to avoid numbered orange jumpsuits.
ETF stocks tries to slow down the up/down merry-go-round by identifying sectors that are showing signs they are ready to out or under-perform the S&P 500. To strip out volatility, investors can craft what ETF Stocks calls a ZERO Trade.
The strategy is simple; buy an ETF from the Emerging/Mature Bull list below and short an equal dollar amount of SPDR S&P 500 (SPY). Or, flip it around and buy SPY while shorting a member of the bear lists.
As long as the out-performance of the buy continues relative to the under-performance of the short, love me or not, this strategy should return a profit. It’s a staple of many hedge funds.
Based on ETF Stocks’ analysis, this is the list of bull and bear sectors.
EMERGING BULL: industries with positive technical analysis traits that are in the early stages, indicating possible above average returns in the near-term:
- Delivery Services (more on this below)
- Building Materials
- Construction & Materials
- Containers & Packaging (more on this too)
- Defense (despite the super duper committee’s failure?)
- Electrical Equipment
- Industrial Machinery
- Industrial engineering (see a trend here?)
- Electrical Office Equipment
- Home Construction
- Health Care
- Commercial Vehicles
- Small-Cap Stocks
MATURE BULL: industries that have outperformed and their charts suggest the above average returns could continue:
- Industrial Supplies
- Industrial Transport
MATURE BEAR: industries that have under-performed and based on their current chart patterns and could continue to lag:
- Specialty Construction
- Medical Supplies (factoring in the Obamacare surcharge?)
- Real Estate (while home construction is on the bull side?)
- Travel & Tourism
EMERGING BEAR: industries that have fresh negative technical analysis set ups and could have subpar performance in the weeks ahead:
- Gambling (Do they mean the Fed?)
- Computer Hardware
- Apparel (an industry leader about to fall?)
- Broadline Retail
- Tech Hardware
- Toys (bah humbug!)
Seeing Delivery Services and Containers & Packaging in the Emerging Bull list reminded ETF Stocks of a recent elevator ride with a UPS guy. Watching what brown was doing, sweating and fumbling around with boxes stacked higher than the gentleman was tall, prompted a question from us, “The economy must be rocking if you are so busy, right?” After all, delivery people are on the front lines of commerce.
He wiped the sweat from his forehead with the sleeve of his company issued shirt, repositioned his hair and said, “No, every day is like this. Everybody just buys stuff online nowadays and we have to deliver all of it. It’s only getting worse (or better if you aren’t the one carrying the boxes), and the Holiday season is just going to be crazy.”
It was only after he shifted the paradigm that ETF Stocks noticed that nearly half of the boxes were decorated with Amazon’s A to Z smile.
Pressing the fast-forward button to today, we couldn’t help but connect today’s Sector Scorecard results with that seemingly unremarkable elevator ride. The two plug right into the shopping news of the day, Black-Friday and Cyber-Monday set records for online orders. ETF can just imagine our UPS guy getting a workout with his dolly stacked six feet high, simultaneously balancing boxes and fending off closing elevator doors.
Somewhere, Jim Cramer’s dad is pressing the Boo-yah button.
ETF Stocks would suggest taking a look at exchange-traded-funds like iShares Dow Jones US Industrial (IYJ), Vanguard Industrials ETF (VIS), Materials Select Sector SPDR (XLB), and/or Vanguard Materials ETF (VAW).
Since there isn’t a Containers & Packaging or Delivery specific ETF, the funds mentioned up top will get you exposure to the stocks within the industries. To wrap this novel up in a pretty ZERO Trade bow, pick the Industrials/Materials ETF of your liking and short an equal dollar amount of SPY.
If our analysis is correct, and the Emerging Bull members outperform the S&P 500, if she loves you or loves you not doesn’t matter, this trade would profit, not including fees, margin interest and commissions.