ETF Rankings: Significant Downside Still Possible In Stocks

Stock-Markets / Exchange Traded Funds Aug 26, 2011 - 12:27 PM GMT

On August 3, we commented that recent breakdowns called for a defensive bias. Unfortunately, our concern about the market’s intermediate-term outlook has become more acute in recent weeks as we noted on August 22. The research presented below highlights the significant downside risks that remain in the financial markets. Until conditions improve, we will maintain a very defensive/high cash posture.

Prior to Ben Bernanke’s Jackson Hole remarks, we reviewed all 223 of the most liquid ETFs that we follow using the CCM Asset Allocation Model. The results of the screening and ranking process are not encouraging. Prior to the Jackson Hole speech, risk markets look absolutely terrible. The list below, with the exception of gold (GLD), points to deflationary outcomes. Fear of deflation could eventually induce more selling in gold and silver.

Notice the bearish tone of the top-rated positions in the table below – the VIX, shorts, bonds, and gold. Unless the tone of the market and the tape improve dramatically, all the evidence we have in hand before the open on August 26 points to significant downside risk in global equities. Note the positions listed below will be the exact wrong place to be in the event of a rally in risk assets, which is why we prefer to remain patient looking for better entry points and/or a read on the market’s reaction to Jackson Hole.

Even in the top-rated ETFs above, we see little in terms of attractive risk-reward entry points. We like the short side of the market, but we would prefer to find a better entry point. Gold still looks good, but the recent volatility has a toppy characteristic to it. We will revisit the top fifty or so ETFs in our recent ranking post- Jackson Hole. We are open to better than expected outcomes, but there is very little evidence, if any, to support the bullish case. The tape needs to improve. The ETFs above could be very volatile – inexperienced investors and traders should be very careful.

Ciovacco Capital Management

Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

Ciovacco Capital Management, LLC is an independent money management firm based in Atlanta, Georgia. As a registered investment advisor, CCM helps individual investors, large & small; achieve improved investment results via independent research and globally diversified investment portfolios. Since we are a fee-based firm, our only objective is to help you protect and grow your assets. Our long-term, theme-oriented, buy-and-hold approach allows for portfolio rebalancing from time to time to adjust to new opportunities or changing market conditions. When looking at money managers in Atlanta, take a hard look at CCM.

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

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