ETF Expert

It’s impossible to call an exact bottom. And it would be foolish to pretend that a 300+ up move after a 300 point "down-at-the-open" is a clear turnaround sign. However, the activity is worthy of serious discussion.

We can start with the obvious: short covering. Those who had been doing it were ready to collect their profits.

After all, how many could afford to wait out the next Fed meeting, let alone the possibility of additional stimulus? Take the money and run.

In particular, those who had been "ultra-shorting" financials had the most to lose. Specifically, investors who boldly went into UltraShort Financials SKF at the start of 08 ended right back at the same spot. (Everything that had been gained was quickly given back in 2 days, from 130 before the holiday weekend to a 106 close today. That’s a 2-day loss of 18.5%!)

Yet, maybe there is a genuine "silver-back" lining here. Maybe there’s a return to some semblance of sanity.

Readers may recall my earlier discussion of the VIX. In essence, I’ve explained that stock markets frequently gain remarkable ground after the VIX (CBOE Volatility Measure) does something unusual.

The VIX is a measure of fear. And when fear spikes higher, stock prices get hammered lower.

Keep in mind, the VIX steadily moved higher throughout January, spiking to 52-week highs at the start of Tuesday’s and Wednesday’s trading. Yet on both days, the VIX settled back down… all the way down to 29 at the close.

Out of the woods? Hardly. 29 is still a relatively high level for the VIX and a high level of fear. But a VIX that settles down has been a reliable indicator of "good" buying opportunities. (And, it follows, perhaps there was something more than "short covering" going on today.)

Perhaps Jim Cramer was right when he called a bottom in financials a few weeks back. Although Jim changes his mind often, I am referring to the call he made on 1/10/08.

Although 1/10/08 was not the precise low point for the Select Spider Financials (XLF), one should take note of this: XLF is higher today than it was on 1/10/08. How many sectors can say that? Precious few!

Since a pure financials play seems a bit premature, I have been advocating a return to the Dow Jones Select Dividend Index (DVY). Like most dividend-oriented offerings, you’d expect the 40% weighting in financials. But more important:

If the market leadership is indeed changing, and…
if the market itself is due to make a comeback, and…
a 4.25% yield seems attractive to you, then… why not look here?

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.