Marketocracy, in their own words, is:

"""Marketocracy Data Services is a research company whose mission is to find the best investors in the world and then track, analyze, and evaluate their trading activity. The company's affiliate, Marketocracy Capital Management, is the investment advisor for the Marketocracy family of mutual funds and uses the research generated by Marketocracy Data Services."""

This isn't an endorsement for Marketocracy, but last October, I started a portfolio there as part of the activities for a club here at the University of Michigan.  While I'd originally intended it to be allocated strictly from the Select Sector SPDR ETFs, Marketocracy rules led me to increase the scope of the fund to include commodities, currencies, and geography-based ETFs.

You can view the portfolio performance at this link: www.marketocracy.com/cgi-bin/WebObjects/Portfolio.woa/ps/FundPublicPage/source=DeDoDkLbEhAdLcIhMaKiAbDd

Mine

m100

S&P 500

DJIA

Nasdaq

My largest positions at the moment are DUG @ 14%, SHV @ 11%, UPW @ 7%, and EWA @ 5%.  I doubled my exposure in DUG, the double short Oil & Gas fund, this week as it hit a new 52-week low, despite downgrades in both the funds' constitutents and projected consumption.  I'll be looking to lighten the position in the short-term treasuries SHV in the coming month for bottom plays, possibly in the double long financials ETF UYG or some mixture of country ETFs.

ProShares has offered a variety of "Ultra" and "UltraShort" sector ETFs for more than a year now.  These funds are designed to track twice the return of the underlying index, and each corresponding long fund is created to match its corresponding short. 

There is no doubt that these ProShares offerings have been the subject of a great deal of interest.  They promise the rewards of leveraged sector returns without the headache of margin or portfolio construction, allowing profitable bets with less capital and less risk.  This might not come for free, however, and many have investigated how closely these funds track their double-return target in terms of price.  For more on that topic, I suggest this article directly from ProShares.

Instead of asking whether these funds track twice their underlying index, however, I've decided to investigate whether each pair of funds behaves as expected.  That is, given two well-constructed  index portfolios, the sum of the long fund's return and the short fund's return should equal zero.  Though the behavior of the underlying derivatives might be expected to introduce some tracking error, we should  expect to see only relatively small differences relating to the difference between price and NAV.

The following chart demonstrates the cumulative return difference between the long and short funds.

The chart demonstrates that this is far from the case.  In fact, nearly half of the sectors have seen over 20% deficits in this balance since June of last year.

Looking for explanations outside of portfolio construction leads to a believable alternative.  Charting dollar volume differences shows that almost every single sector had greater dollar volumes on the short side.  In some sectors like Materials and Real Estate, the difference in dollar flow over the past year has hit tens of billions.  It seems likely that these funds are much more valuable as insurance for the down-side than as single-sector long bets.  In other words, if investor are much more likely to bid on and bid up an UltraShort Sector insurance contract, imbalances such as these might be expected.

The following chart represents the total percent change for each of the S&P Select Sector ETFs for the past session, week, and month.

Financials and Energy have led the market decline over the past month, returning a respective negative 8% and 7%.  In contrast to Financials, Energy showed some support last week as a draw in reserves overcame a downward revision on Exxon Mobil's projected targets.

This last week's rebound in Energy and Materials, however, is a complex result.  Given that there was little positive data last week and that the consensus calls for more recessionary-supporting data next week, the Energy and Materials sectors must be reacting to expectations on inflation and the exchange rate. 

I'll be watching for unexpected data from Monday's Chicago PMI, Tuesday's ISM, and Wednesday's Employment, Factory, or Crude releases.  Here are some of the simplest ways to use ETFs to make bets on these moves:

UYM: Double Long Materials or SMN: Double Short Materials
DIG: Double Long Oil&Gas or DUG: Double Short Oil&Gas

Note that both of those long-side ETFs have suffered from low liquidity relative to their short-side counterparts lately.  Thus, buying calls or writing puts in the underlying Select Sector ETFs XLB or XLE are alternative ways to hedge larger positions that might suffer from liquidity costs.

  The past week provided the first signs of support in the overall market for a long while, with financials rising, energy falling, and two consecutive overall days in the black.  The top gainers relative to the S&P for the week were financials and materials, with energy and technology falling the hardest compared to the market.  Crude fell below $90 on Friday as well, likely decreasing inflationary pressure and giving the Fed less downside risk for lowering rates, further widening the difference between financials and energy.

  With respect to volatility, utilities and staples remained the least risky relative to the S&P, with financials and discretionary coming up on top on the other side.

  Here are the table summaries.

 Return

Volatility

I've covered sector minimum spanning trees many times in the past, and here we see the current trees for the past week and month.  As minimum paths within the log-return correlation matrix, they represent the structure and dynamics of the market as broken into sectors. 

Notice that utilities and energy have been especially distant from the S&P and that the Russell has been most tied to the weak discretionary and financials over both intervals.

Week MST

Month MST

    As optionable securities, ETFs are providing traders with a dramatically safer means of profiting from sector momentum.  Though the AMEX and Philadelphia Exchange have listed index options for a number of years, the liquidity and rate of expansion of these derivatives was relatively varied.  Thus, many traders continued to rely on options for individual stocks within a sector as a proxy for the sector as a whole.

    With the rapid expansion of ETFs and the competition between issuers and exchanges that has ensued, the number of sector and specialized index options has grown dramatically.  The following is a list of the top 30 ETFs on which options can be traded, ranked by volume.