The ETF Portfolio Strategist: 1 Jul 2022

Trend Watch: G.B16 ETFs

Welcome to the new era of The ETF Portfolio Strategist. Starting today, I’m rolling out a new set of analytics, which focuses on trend. I’m confident that this revision will provide a more practical, reliable set of indicators for profiling trend behavior.

The basic idea: compute 5 different trend indicators, ranging from an ultra-short-term focus out to a long-term profile, with several intermediate variations. The goal: look for turning points in search of relatively reliable buy/sell signals.

As an example, let’s run through some data using the G.B16 opportunity set. For perspective, see the last table at the end of this article. (Note: as time goes on, I’ll be adding more ETF categories, but for now I’ll start with G.B16.)

At the far right in the table below there are five columns, running from Trend 1 to Trend 5. The Trend 1 data is the ultra-short-term analysis; Trend 5 is the longest. Scores range from 0 (the lowest/weakest trend reading) to 1.0 (the highest/strongest trend rank). The top-third of scores (0.65 and higher) are highlighted in green; the lowest third (0.35 and lower) are highlighted in tan. Scores between those triggers have white backgrounds.

An aggregate score is found in the “Signal” column. These scores range from -5 (extreme bearish trend) to +5 (extreme bullish). The weakest three scores (-3, -4, and -5) are highlighted in the salmon color. The strongest trend scores (3, 4, 5) are highlighted in green.

The resident philosophy is to favor ETFs with the strongest trending behavior (3, 4, 5); avoid or short the weakest trends (-3, -4, -5) and keep an open mind/take a closer look at the rest.

As a practical example, consider the Treasuries ETF (IEF), which currently has the strongest momentum score of the lot. Nonetheless, there’s still a compelling case to remain cautious on IEF. Why? The bullish scores only apply to the two shortest trend windows. When a third trend window flips to a bullish profile, the analytics will indicate that the odds appear skewed in our favor for establishing a long position in IEF. Four trend windows in the bullish camp would be even more compelling, and five more so still.

With that in mind, the table above is telling us to monitor IEF for a possible bullish breakout. Meanwhile, the rest of the field looks quite weak by comparison.

In upcoming issues I’ll provide more detail on trend score calculations and offer deeper analysis of specific ETFs. I’ll also be adding other ETF categories.