ETF Expert

Bad news has been spinning right round… baby, right round. And it has apparently been working. Consider these examples:

Terrible News Item #1. The U.S. economy contracted at more than 6% in Q1 2009, far exceeding the consensus of -4% GDP.

Spin: The horrific GDP was baked into the cake already, and the 2nd quarter is looking brighter. Moreover, Bernanke says the U.S. is on the road to economic recovery.

Terrible News Item #2. The World Health Organization (WHO) places the swine flu outbreak close to the highest warning level for a potential pandemic. Financial repercussions for economies could top $3 trillion.

Spin: Deaths are fairly well contained to Mexico, and the Mexican government has already issued a "business back to usual" mandate. Pharmaceuticals (XPH) are a good "play."

Terrible News Item #3. Financial ministers from across 13 Asian nations agreed to set up an emergency $120 billion liquidity fund to help counter the global financial crisis. Separately, Japan, Asia's largest economy, said it will provide up to an additional $60 billion to Asian nations via emergency swap agreements. Many Asian economies have been free falling since their main engine for growth, Western markets, nearly stopped importing goods overnight.

Spin: Asia is still booming. The economies are becoming more self-sufficient, able to trade with one another rather than require the U.S. and Europe as much as they have in the past. As for the liquidity fund, it's just a precaution to help out the smallest Asian economies during the liquidity crisis. No real banking problems or "stress tests" to worry about here.

Terrible News Item #4. Chrysler entered Chapter 11. GM appears set to do the same.

Spin: Chrysler and GM will come out leaner and meaner, and be back on their feet in a matter of months, not years.

Terrible News Item #5. More than half of the "too-big-to-fail" banks need to raise more capital, according to preliminary bank stress test leaks.

Spin: Ehhhh… the worst is behind them.

Keep in mind, short sellers usually refrain from soaking up the sit-n-spin. So one might surmise that a 34% rally in the S&P 500 over 8 weeks might lead an army of naysayers back to the game table. But it hasn't happened… at least not yet.

One reason may be the SEC's timely announcements. For instance, today the head of the SEC announced that restrictions on short-selling is a top priority. And Bernanke has added speculative fuel to the hopeful fire by announcing that housing is near a bottom.

There's another challenge to the short-selling mob; specifically, a number of technical charts make the short ETFs look like very bad bets.

Feel like the Nasdaq is way overpriced? Think it's due for a pullback? Perhaps. But shorting the Nasdaq 100 with the Short Nasdaq 100 QQQ ProShares (PSQ) hasn't been profitable since early March. What's more, the current price is significantly below a long-term 200-day trendline.

Okay, so the Nasdaq 100 is tech-heavy and growth-oriented. What about shorting the S&P 500 via the Short S&P 500 ProShares (SH)? Surely it must have better prospects due to weakness in segments like financial services and industrials… won't it?

The bottom line for those who wish to use "Short ETFs?" One might need to wait for something stronger than a "gut feeling." Specifically, if Short S&P 500 ProShares (SH) garnered a bit of momentum on the way to $78, one might climb aboard for a brief trading expedition.

What about the "Naz?" Short Nasdaq 100 QQQ ProShares (PSQ) would likely need to approach the $70 price point on high volume.

In truth, a pullback is probably in the cards. And one could probably use these very same tools to make a get-in-get-out decision today, rather than wait for trendline confirmation.

That said, I'm inclined to steer clear of the short funds altogether. Right now, they represent more of a gamble than a genuine investment opportunity.

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.

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 Adviser 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.