ETFs from Schaeffer Investment

03/25/2005 12:00 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocelynn Drake and Beth Gaston are both analysts at Schaeffer's Investment Research. In addition to stocks and options, their coverage also includes exchange traded funds. Here, they look at the prospects for ETFs based on energy and materials.

"Pessimism continues to blanket the Energy Select Sector SPDR Fund (XLE ASE)," says Jocelynn Drake. "Traders have been stocking up on puts. Overall, puts easily dominate calls in the front three months of options, outweighing calls by more than five-to-one. Digging deeper into the security's sentiment backdrop, short interest soared 21% higher in February to 29.5 million shares. This accumulation of bearish bets is more than seven times the equity's average daily trading volume. An unwinding of these positions could provide XLE with a substantial boost higher. Technically speaking, XLE has pulled back to test support at its rising 20-day moving average, a trendline it has not closed below since January 11. What's more, the ETF has ridden the support of its ten-week and 20-week moving averages since November 2003. During this time frame, the shares have gained more than 77% percent. This combination of stellar technical strength and heavy pessimism has earned XLE a Schaeffer's Equity Scorecard ranking of 9.0 out of 10.

Adds Beth Gaston, "The Materials Select SPDR Fund (XLB ASE) is an exchange traded fund engineered to correspond to the movement of the materials sector. Its top-five holdings are DuPont, Dow Chemical, Alcoa, International Paper, and Newmont Mining. The fund has mounted a steady advance since March 2003, gaining nearly 90%, recently notching a new all-time high. Meanwhile, there has been a recent rush of put buying among the speculative crowd. Short interest has been gradually building on the ETF since December 2002, and the number of shorted shares grew by 16% last month to 6.8 million. At the present juncture, it would take bearish players more than seven trading days to cover all of these positions. If the fund continues to move in a northward direction, the chances of a short-covering rally are fairly good. The fund's combination of a solid technical trend and continued pessimism results in an Equity Scorecard ranking of 8.0."

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