ETF Expert

Lately, it appears as if the stock market is moving higher or lower on the Dow by 100 points every day. Should you buy the dips? Should you take profits? Should you hold on tight?

If you wish to sleep soundly, it is critical to know the circumstances under which you might sell. For example, you might lessen your equity exposure if the price of the SPDR S&P 500 (SPY) fell below its long-term, 200-day moving average (a.k.a. trendline). With SPY trading in and around 153, it would need to fall below 145 to breach the trendline.

Of course, you don’t have to track charts or follow technical price changes. Perhaps you would prefer fundamentals or historical indicators or contrarian data… whatever information floats your boat. The only thing that you can ill afford to do is hold-n-hope; holding-n-hoping that the market will survive every mess hall without a food fight could be catastrophic.

So let’s say that you like fundamentals. And let’s say that you’re looking at the historical P/E of small companies… and that small-caps are starting to look a bit overvalued. What can you do?

Well, for one thing, you might look to the other side of the gymnasium. The Rydex Russell Top 50 ETF (XLG) invests in enormous companies dubbed "mega-caps."  These gynormous corporations boast stock price valuations that are more attractive right now than small- and mid-sized companies.

Granted, the Rydex Russell Top 50 ETF (XLG) has been trailing the S&P 500 by several percentage points in 2007. Yet, in times of concern about the price of stocks, investors often leave smaller companies for the perceived safety of the "tried-and-true." (Of course, we are not talking about the Nasdaq here; we’re talking about AT&T, J&J and Exxon Mobil).

Naturally, you would still want some method of protecting against a downside slide. Maybe you would sell if the P/E for the Rydex Russell Top 50 ETF (XLG) jumped from 15 to 18. Or perhaps you would sell if the exchange-traded fund fell 7% from the highest price reached since your initial purchase.

And then… of course… there’s always the 200-day moving average. In the chart below, one might be inclined to lower his/her exposure to XLG if the 114 price point breached the trendline at roughly 108.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above.