Using ETF’s to Track Market Sectors

Exchange traded Funds (ETF’s) are a derivative product that trade on the various stock exchanges.  What this means is that holding an ETF is not the same thing as owning a particular commodity or index that it represents.   It is different from a futures contract where you can in fact take physical delivery of a commodity.  An ETF or Exchange Traded Note (ETN) is a derivative product that is created based on a relationship with an underlying index or commodity.  For example, GLD, which is one of the gold related ETFs on the US exchange, is not the same as owning actual gold or even a gold future.  While GLD has some relationship to gold it is not gold, but provides a vehicle to trade the changes in the price of gold, and also, a means for tracking what the price of gold is doing.  Similarly, there are index and sector ETFs that can provide the same function and allow you to track different sectors, countries, commodities’ and even investing styles.  In the United States, there are over 700 ETFs currently available.  In Canada, we have a much smaller number.  We currently use 9 sector ETFs to track the main sectors in the US.  We will be watching the ETFs more closely over the next few weeks as well as the underlying stocks that make up the ETF to determine which sectors are showing the most promise and also to build up a watch list of potential candidates to consider.  At the same time, we will be carefully monitoring the market price action to ensure that it is truly recovering and price stability is returning. 

The bullish sentiment continued yesterday, pushing indexes closer to the 200 DMA resistance level.  At the same time, the volume levels are dropping, suggesting the rally is losing steam.  Oil remains in a range along with gold and silver.

As of this writing, futures are negative and the DAX is negative, indicating a down open.    Market condition scans are showing a jump in the numbers for the institutional scan, which is important as it indicates that the institutional investors are starting to accumulate stocks.    The remainder of the market condition scans remain neutral.  The market bias indicators continue to indicate a bearish bias.  Once again, we do not have a clear indication of short term market bias.  However, given the dropping volume, accumulation of bearish bias indicators and extreme overbought levels, caution is warranted.

Index	Change	%Change	Level	Phase
TSX	+198.06	+2.25%	8995.50	Recovery
DJIA	+174.75	+2.25%	7924.56	Recovery
Nasdaq	+58.05	+3.08%	1587.00	Recovery
SP 500	+18.98	+2.33%	832.86	Recovery
Russell 2000	+18.78	+4.40%	445.29	Recovery
NYSE	+103.53	+2.02%	5230.63	Recovery

Source: Telechart

Short Term market outlook:

Bias: Scans showing a neutral bias

Energy: Weak

 Primary Trend: Remains down

Sector	Phase
Consumer Staples	Recovery
Healthcare	Bearish
Technology	Recovery
Utilities	Bearish
Energy	Recovery
Financials	Recovery
Industrials	Recovery
Materials	Recovery
Consumer Discretionary	Recovery

Source: Telechart