Welch Favoring Water, Singapore, Currency ETFs

July 30, 2008

But manager of ETF portfolios remains skeptical about financials and most other segments of the stock market.


Anthony Welch isn't jumping on the rally in financial stocks that started after regulators clamped down on naked shorts in mid-July.

Even though trading has spiked on exchange-traded funds focusing on financials, the portfolio manager at Sarasota Capital Strategies remains skeptical. He points to the biggest and oldest in the group, the Financial Select Sector SPDR (AMEX: XLF). "It's now the second-highest ETF in terms of average daily trading volume," Welch said. "That's just amazing considering this is a fund that's still down almost 30% year-to-date."

The ETF technically still appears to be in a downtrend that began last July. "XLF broke below its 200-day moving average, which is a key long-term technical measure, and hasn't come anywhere near it since," Welch said.

The independent money manager and advisor to high net-worth and institutional investors would like to see XLF at least move above its 50-day moving average line. That's a key short-term metric that tracks price movements in the market.

Right now, shares of XLF are trading a few percentage points below that $22 level. "It stuck its head above that price several times in the past week," Welch said. "But it keeps meeting resistance and hasn't been able to break through."

If it shows more momentum, he says Sarasota Capital's managers might dip their toes into XLF. They dumped their last holdings in the sector on July 27, 2007. The firm's main holding in the area at the time was the Rydex S&P Equal Weight Financials (AMEX: RYF). They sold it at $49 per share and it's now trading around $30.

"We've sat out this whole rally," Welch said. "Nobody really knows what's going on inside these financial companies. So the fundamental question marks hanging over this sector are huge and our charting work shows the market's skepticism."

Still In The Black

But he's sticking with PowerShares Water Resources (AMEX: PHO). So far this year through Tuesday, it remained in the black. In the past 12-months, PHO has gained more than 3%. "It doesn't sound very exciting until you compare that to the S&P 500's 13% drop this year and nearly 12% fall in the past 12-months," Welch said.

The fundamentals are driving that outperformance, he adds. Demand for water treatment systems, technology related to water consumption along with a host of other components of PHO makes both short- and long-term prospects for the alternative energy fund strong, Welch says.

Another long-term holding he's planning to keep is the iShares MSCI Singapore Index (NYSE: EWS). It's down about 8% so far this year, but it has outperformed both broad U.S. as well as emerging markets as a whole. For example, iShares MSCI Emerging Markets Index (NYSE: EEM) has fallen almost 10.8% in 2008.

"Singapore is right in the middle of the action in Asia's economic development," Welch said. "It's a safer way to play China's growth and we really like the country's highly educated employment force. And it has a much more stable banking system than most of the rest of Asia."

Sarasota Capital's managers moved into EWS at $13.02 per share on a technical breakout in early April. The firm's clients are down 3.5% on its shares now. It has a stop-loss order of just under $12 per share. "That was an uptrend we drew starting at March 17's bottom. This month on the 15th it set a higher low," Welch said. "So we drew a line between the two low points and if it breaches that line, then we'll probably look at getting out."

Now In The Red

He's also holding onto the PowerShares DB G10 Currency Harvest (AMEX: DBV). Welch started buying it as soon as the ETF launched in September 2006. It has returned nearly 2% in the past three months, although it recently has slid and now is negative for the year.

"It's an alternative asset strategy that's comprised of currencies from the top developed foreign markets in the world," Welch said. "So it's a great diversifier with no correlation to U.S. stock markets. And we consider it a separate asset class to foreign bonds as well."

Sarasota Capital has actually designed a model of all the different currency ETFs. "It's a system we've created to optimize trading currency ETFs in our portfolios," Welch said.

The models are showing renewed strength in the U.S. dollar as well as Mexico's peso. Welch says some other emerging markets currency funds are also looking attractive. He holds long positions in CurrencyShares Euro Trust (NYSE: FXE) and CurrencyShares Japanese Yen Trust (NYSE: FXY). "But both have been showing weakness lately and our signals are close to a sell on each," Welch said.

On his radar is the PowerShares DB U.S. Dollar Index Bullish (AMEX: UUP). "It has technically held support at about $22.10 per share and remained in a tight trading range since March. If UUP breaks above about $23.25, we'll probably go long on it," Welch said.

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