ETF Expert

So Barron's called a bottom this weekend. Does that mean the market will fall even further now?

Of course, many of us have provided reasons why the market should go higher. Last week, I provided 5 reasons of my own for subdued, near-term optimism.

Nevertheless, there's been one noticable ingredient missing for a bear rally, let alone a new bull market. What's going to be the catalyst?

For instance, we might expect reversion to the average market P/E, mean 200-day moving average and/or mean annualized appreciation for stock assets. Yet none of these are likely to occur quickly without a little help from a confidence-boosting act of business and/or government leaders.

Unfortunately (or fortunately), there aren't any high-profile TARPs, TALFs or alien-friendly ALFs on the docket; then again, there is the House Financial Services Sub-Committee meeting on mark-to-market accounting on Thursday, March 12, 2009.

Banks say that mark-to-market accounting forces them to value some of their assets at artifically low prices, which may not make sense if they plan to keep those assets well beyond the current financial crisis. Billions of write-downs have caused many banks to struggle to maintain their capital requirements, treating write-downs as virtual write-offs. Some believe those write-downs will be write-ups in a more liquid environment for "toxic assets."

In a world where confidence is everything, if the SEC and Financial Accounting Standards Board (FASB) can convince the subcommittee to take action, therein lies a catalyst to stabilize the most beleaguered and beaten segment — the financial segment.

I am not advising that anyone get giddy about buying into financial stocks for the so-called long-term. The volatility alone is enough to make a gambler's wallet tremble.

Yet if one is predisposed to purchasing near potential lows and then selling into an upcoming bear rally, the SPDR Financial Fund (XLF) may be a means for "get-in, get out" participation. The more adventurous could lever up to UltraFinancial ProShares (UYG) or Direxion Financial Bull 3x (FAS).

A quick examination of the current trading environment shows that some people are already thinking about the possiblity. Here's how the financial ETFs fared through the choppy trading day of Monday, March 9.

Financials, in today's world, are almost entirely speculative. In contrast, the fact that Utilities (XLU) have sold off to new 52-week lows below 22.7 seems strangely out of line with a strong infrastructure relationship. Then again, the broader markets are only batting 2 for 15 in the last 15 trading days… almost as bad as Alex Rodriguez in post-season baseball.

So why in the world should utility ETFs like SPDR Utilities (XLU) or iShares DJ Utilities (IDU) go anywhere? Because on March 5, an unknown institutional player placed the largest ever option trade in the history of trading XLU options. 142,000 call options were purchased at an April strike price of 25.

The implication? Someone is either covering short positions or expecting new legislation to send the utilities market dramatically higher in a short period of time.

I myself look to Utilities (XLU) as a means to get 2x the yield of a 10-year treasury bond with a high probability that in 10 years, Utilities would be at least the same price as it is today. (The highest probability is that it would be substantially higher than it is today!) The difference in compounding on the yield alone gives an investor roughly $25,000 more dollars on every $100,000 invested.

Granted, it's rather painful to watch investments drop 20% in value in a matter of weeks, and still play up a 4.5% yield. Still, how can anyone seriously look at a diversified utilities fund paying out 4.5%, and not believe it's a better deal than a 2.7% 10-year treasury? I understand the loss of confidence, but is it impossible to see the wisdom of greater patience?

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.