ETF Expert

Everyone points to the November 2008 lows as a critical "bottoming" area for stocks. For the S&P 500 to build a base, it has been said, it must not establish new closing lows below 750.

Keep in mind, though, virtually all assets and sub-classes free-fell in November. Corporate bonds, inflation protected bonds, high-yield bonds, preferrred stock, U.S. common stock, foreign stock, as well as scores of commodities, all hit 52-week lows November 20.

Some of these asset types have continued to fall, setting new lows. Deflation fears and dollar devaluation took the wind out of oil and base metals. Meanwhile, stocks have been in a wide trading range since November, with the S&P moving between 750 and 940. (If you exclude one day, we're really talking about 800 and 940.)

With trillions of taxpayer dollars being spent on stimulus, bailout, confidence restoration and "breaking-the-deflation-death-spiral," are the markets already worried about the repercussions?  The rise in precious metals and treasury-inflation protected securities suggests that the markets might be thinking way ahead.

Consider the once-boring area of the iShares Treasury Inflation Protected TIPS (TIP). It seemed pretty hard to get excited about a 2% or 3% yield when things were moving along smoothly… inflation be damned.

Then the commodity bubble burst, followed by the credit calamity. Deflationary pressures sent TIP form 110 to 90 in a matter of months. Nevertheless, in a few more months, the iShares Treasury Inflation Protected TIPS (TIP) was back above 100.

Perhaps the yield itself was enough to get buyers interested. It's as high as 6.25% today… pretty hard to beat for income investors.

Yet there's little reason to doubt that 0% overnight lending rates and the massive amounts of Fed liquidity injections aren't persuading some people to use TIP as an investment in the future; that is, palpable inflation may just be a matter of time.

In addition to a desirable 6.25% yield right now, there's another sign of strong demand for the iShares Treasury Inflation Protected TIPS (TIP). It's one of a select group of ETFs that currently push the 200-day moving average AND have risen close to 10% in 10 weeks.

There are those that gold and silver also protect against inflation. If the markets were living in the present, rather than acting in a forward-looking manner, one might expect to see the Powershares Precious Metals Fund (DBP) struggling alongside equities.

Instead, the historical inflation-fighting metals have accomplished what few ETFs have done since the November lows; specifically, DBP has pushed above a long-term trendline of 200 days AND racked up more than 10% gains… much like TIP.

Sure, we can talk about fear of currency failure favoring precious metals. Or we can point to an outstanding 6.25% yield as sparking interest in inflation-protected treasuries. Nevertheless, I am equally inclined to believe that these trends are a result of forward-looking plays on the eventual return of inflation.

If you'd like to learn more about ETF investing… then tune into "In the Money With Gary Gordon." You can listen to the show "live" or via podcast or on your iPod at this link.

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.