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5 ETFs In New Uptrends With Big Institutional Buying

Posted
2/8/2013 9:00:00 AM
By: Investor's Business Daily
Referenced Stocks:ARUN;N;RAX;SAP;SKYY

Cup-with-handle bases are the most bullish chart patterns, as explained in IBD founder William O'Neil's best-seller, "How to Make Money in Stocks."

These bases form as bargain hunters start snatching up shares at new lows. As they push the stock up on the right side of the pattern, the stock corrects slightly again as previous buyers who bought at higher levels sell to get out even. After those final weak investors get shaken out, heavy institutional buyers return, pushing share prices back up, resuming the uptrend.

A breakout to new highs from a cup or cup-with-handle pattern  means sellers have been shaken out at lower prices and the stock can start a fresh uptrend again.

Here's an overview of five ETFs that have recently broken out of cup-with-handle or cup bases. They all fell into bear markets in 2011, slumping 40% or more. They've since slowly but surely stair-stepped off of their 2011 lows. They also trade above their 50-day moving averages and 200-day moving averages, which confirms they're in a strong uptrend.

They sport a high IBD Relative Strength Rating of 64 or higher, which means they've been rising higher and faster than two-thirds of the market the past 12 months.

They also all feature IBD Accumulation/Distribution Ratings of C or higher on an A-to-E scale. This indicates institutional investors are buying more shares than selling.

As with stocks, buying ETFs far past proper buy points diminishes the chance of generating gains using these patterns. And since no chart pattern works perfectly, investors must be ready to use sell rules to limit any losses and protect capital.

With the technicals out of the way, here's an overview of the fundamental drivers behind these five ETFs, listed in alphabetical order:

1.First Trust ISE Cloud Computing Index ( SKYY ).

IBD Relative Strength Rating: 66.

IBD Accumulation/Distribution Rating: B.

This ETF includes 42 Internet or software companies, includingRackspace Hosting ( RAX ),Aruba Networks ( ARUN ),SAP ( SAP ),NetSuite ( N ) andNetflix (NFLX). They're engaged in storing and moving data over the Internet or the cloud via high-speed, broadband networks.

Cloud computing provides several advantages to consumers and businesses, Ryan Issakainen, a senior vice president at First Trust wrote in a report:

A. Software downloaded online is less likely to be pirated or passed around like a CD-ROM.

B. It enhances productivity for corporate tech departments, which no longer have to maintain in-house servers.

C. It lets online retailers rent space from cloud providers to handle increased traffic during the busy holiday shopping season without having to buy their own machines that would sit idle the rest of the year.

D. It lets consumers sync data on their phones, computers and tablets without having to connect them to each other without a cable.

"As with any new innovation, cloud computing companies face their own specific risks and challenges. These include security, risk management and compliance, among others," Issakainen wrote. "Additionally, many CIOs have initially been hesitant to incorporate cloud computing into their business models, preferring to wait for more widespread adoption."

SKYY trades at rather lofty valuations compared with the market. It trades at 25 times earnings vs. 13 for the market. It also trades at higher price-to-book, -sales and -cash flow compared with the market.

2. Global X Norway ETF (NORW).

IBD Relative Strength Rating: 64.

IBD Accumulation/Distribution Rating: C+.

NORW is pretty much an energy play, as nearly half of assets are invested in the sector.Statoil ASA (STO), accounting for a fifth of assets, enjoys "robust revenue growth, compelling growth in net income, attractive valuation levels, expanding profit margins and good cash flow from operations," the Street Ratings wrote in a stock report.

"The revenue growth greatly exceeded the industry average of 6.6%. Since the same quarter one year prior, revenue rose by 30.5%. Growth in the company's revenue appears to have helped boost the earnings per share.

"The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 141.7% when compared with the same quarter one year prior, rising from $1.15 billion to $2.79 billion.

"Gross profit margin of 37.50% has increased from the same quarter the previous year. Along with this, the net profit margin of 8.88% is above that of the industry average."

NORW trades at a discount to the average world index on nearly all valuation metrics while yielding a fat 5% dividend vs. 2.5% for its benchmark and sporting higher sales and cash-flow growth. NORW trades at 10 times earnings vs. 13 for world stock.

3. iShares Dow Jones U.S. Broker-Dealers (IAI).

IBD Relative Strength Rating: 83.

IBD Accumulation/Distribution Rating: A+.

IAI combines two dozen Wall Street powerhouses, includingGoldman Sachs (GS),Morgan Stanley (MS),Charles Schwab (SCHW),NYSE Euronext (NYX) andCME Group (CME).

S&P Capital IQ rates the industry neutral. Kenneth Leon, an equity analyst at S&P wrote in a report released Sunday: "Following equity trading volumes that showed declines in 2012, we see trading volumes rising modestly in 2013 as investor confidence rises and equities become more attractive than bonds.

"We view several factors as key contributors for continued underwriting and advisory improvement. We think there is a positive correlation between equity market appreciation and IPO (initial public offering) activity, boosting private companies' incentive to go public when valuations are higher.

"We also view high levels of cash on corporate balance sheets as additional support for mergers and acquisitions (M&A). In 2013, we think companies will put this cash to work with either strategic or tactical M&A if the macroeconomic drivers and the capital markets remain stable. Potentially, U.S. budget and European sovereign issues may become reduced risks that enable the pipeline for M&A and new equity offerings to rise.

"We remain less confident that institutional clients will materially increase trading activity at major brokerages, although a lot will depend on asset flow in their clients' funds business. Should market volatility subside, we also expect retail investors to re-engage into risky assets, especially equities, as expected return potential for fixed-income investments remains less attractive in a low interest rate environment."

4. iSharesMSCI Spain Index (EWP) .

IBD Relative Strength Rating: 64.

IBD Accumulation/Distribution Rating: C.

After breaking out to a 52-week high in late January, EWP has pulled back sharply to its 50-day moving average following news of political scandals in Spain and Italy . The sell-off on the negative news may present a classic opportunity to follow the adage: "Be greedy when others are fearful and be fearful when others are greedy."

Richard Peterson, founder of MarketPsych.com, wrote in his blog that stock markets in unstable countries tend to outperform the happy ones.

5. iPathMSCI India Index ETN (INP).

IBD Relative Strength Rating: 64.

IBD Accumulation/Distribution Rating: B.

Major investor-friendly changes have reignited foreign direct investments in the country, Zacks Equity Research  wrote in a report. India's stock market zigs when the American market zags, offering U.S. investors diversity, but it's volatile, writes Patricia Oey, an analyst at Morningstar .

The exchange traded note offers exposure to a handful of U.S.-traded Indian companies, includingInfosys (INFY),HDFC Bank (HDB),Tata Motors (TTM).