Gutsy ETF Turnaround Plays for 2012

01/05/2012 8:00 am EST

Focus: ETFs

Price Headley

Founder and Chief Analyst, BigTrends.com

Health care was a star performer in 2011 while coal crashed and burned, but if these trends reverse in the New Year—as often happens—traders should identify the signals and be ready to capitalize.

Though there are exceptions to every rule of thumb, there’s a reason a rule became a rule in the first place: it works more often than not. 

One of the more effective rules has often been the avoidance of last year’s leaders, and the ownership of last year’s biggest losers. The former tends to be overbought while the latter is usually oversold after 12 months of excessive movement.

See related: The 10 Most Overbought Dow Stocks

Anyway, to help lay some groundwork about your 2012 plans, here’s a look at the best and worst of 2011, based on the S&P sub-indexes.

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Let’s take a quick look at the #2 2011 performer, Managed Health Care, which contains big names like Unitedhealth Group, Inc. (UNH), Wellpoint Health Networks, Inc. (WLP), Aetna Inc. (AET), and Humana Inc. (HUM). One of the closest ETFs to the index would be iShares US Healthcare Providers Index Fund (IHF).

The daily chart below shows that IHF has recovered most of the losses experienced in July/August and hasn’t yet shown any technical weakness to warrant downside bets. The odds, however, favor this group not outperforming the others in 2012.

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NEXT: Is Coal the Comeback Story for 2012?

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One of the biggest loser groups of 2011 was Coal & Consumable Fuels, including stocks like Consol Energy (CNX), Peabody Energy Corp. (BTU), and Alpha Natural Resources (ANR). The most well-known coal industry ETF is the Market Vectors Coal ETF (KOL), which holds these names and others.

As would be expected, the KOL chart is a down-trending one for 2011 (see below). However, if one wants to bank on the “last year’s loser is this year’s winner” philosophy, holding above (and continuing to rebound from) the October panicky-looking bottom is important. 

Daily Percent R (%R) has been below key mid-levels for the vast majority of the time since last April. That indicator likely needs to show some sustained strength for a rally to have legs.

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As many of you know, we generally aren’t bottom feeder, reversal-type players; our best indicators are finding the accelerating trends and breakouts. So we would wait for both of these groups discussed (and the others on the initial list) to show a clear trend reversal before jumping in. 

Remember that in addition to the calendar rule of thumb are the rules "The trend is your friend" and "Don’t catch a falling knife."

By Price Headley of BigTrends.com

The Big Trends ETF trading program is ETFTRADR, which gives real-time option trade recommendations for the best-moving ETFs targeting gains over shorter time frames from a few days to a few weeks.

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