Many traders have asked me the same question during my 40 years
of trading. What is the key to being successful?
Over the years, I have seen a lot of changes in the market, but one
strategy has stood the test of time: seeking out attractively
valued stocks with strong charts. I especially like established
companies with low price-to-earnings (P/E) ratios in strong
This is one reason the
Rydex S&P 500 Pure Value ETF
interests me. RPV is an exchange-traded fund that seeks to
replicate the S&P, and is currently comprised of 98 of the most
attractively valued stocks in the S&P 500. The average holding
of the ETF has a P/E ratio of 13.5. In contrast, the current P/E of
the S&P 500 is 16.7.
RPV's one-year performance ranks in the top 1% of its large-cap
value category. For 2009, RPV returned +53.4%. In comparison, the
S&P 500 returned +23.4% for the year.
RPV stands out because it is a "pure play." Stocks included in this
ETF are pure large-cap value plays only. The fund does not include
small- or mid-cap value stocks.
RPV's holdings include 11 different sectors, from financial
services to healthcare to consumer goods. Financial services
account for the largest piece of the pie, about one-quarter.
Utilities and Energy follow at 14.0% and 13.6%, respectively.
Tesoro Corporation (
, a petroleum refiner and retailer, is the top holding. Other
well-known companies among its top 10 holdings include
Sears (Nasdaq: SHLD)
Valero Energy Corporation (
-- a pick I described in last week's
RPV typically reflects the movement of the S&P 500. However,
since the S&P bottomed in March 2009, the ETF far outperformed
the index . The S&P hit a low in March 2009 at 666.79 and has
risen by +71%. In contrast, RPV hit a low of $8.46 and has
increased +194% during the same period --nearly three times the
increase of the S&P.
Technically RPV has broken out of a bullish ascending triangle
formation. The triangle was formed by the uptrend line and
resistance, which was at roughly $24.
Two weeks ago RPV climbed back above its rising 10-week moving
average, showing bullish momentum.
If the S&P continues to rally, RPV is likely to move higher. In
this case, it will probably not encounter resistance until around
$29. If the S&P corrects, RPV will likely find trendline and
lateral support around $23.20.
The indicators are also bullish. MACD is about to cross over its
trigger line, giving a buy signal. The relative-strength index (
) has been trending upward for nearly a year and is well above its
current trendline, a bullish sign. Stochastics has reached
overbought levels; however, strong securities can stay overbought
for prolonged periods of time. So far, stochastics has not given a
Fundamentally, RPV is attractively valued. On many metrics it
boasts the best valuation of its peer group.
The ETF has a trailing P/E ratio of 13.5. The S&P's trailing
P/E ratio is 16.5.
The price to sales (P/S) ratio of its portfolio holdings is 0.23.
This is lowest P/S ratio out of all 32 large-value ETFs. In
PowerShares FTSE RAFI US 1000 (
has the second lowest P/S ratio at 0.49, more than double RPV's.
Vanguard Value (
ETF has the third lowest P/S ratio. At 0.84, RPV also has the
lowest price-to-book value ratio of its holdings compared with its
large cap value peers. The next lowest price-to-book value is PRF
Given RPV's solid fundamentals, attractive valuation, and
technically bullish chart pattern, it could be a worthwhile
P.S. What's the best of the best? I did technical analysis on
all 98 stocks in the Rydex S&P 500 Pure Value ETF and then
fundamentally analyzed ten of the companies with the most
attractive charts. I selected the best of these ten companies and I
reveal the name of this stock in this week's issue of my
newsletter, Double-Digit Trading.
Disclosure: Melvin Pasternak does not own shares of any security
mentioned in this article.
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