ETF Expert

According to Zacks, roughly 70% of companies in the S&P 500 will see their earnings per share drop by 14%. Adjusted for the market-cap weighting of the index itself, the per share profits should fall 15.4%.

For the sake of irony, let’s assume that we were sitting at “fair value” on the S&P 500 at the start of trading on 9/22/08. Then, the benchmark was at 1255. One year later, we’d expect the S&P 500 to rest -15.4% lower at 1062. Where did the market close on 9/21/09… 1063, 1064?

Yes, I recognize that the assessment is a tad too convenient. Nevertheless, we should probably acknowledge that the market is not wildly overvalued, not by Shiller’s 10-year P/E, and not by “quicky” comparisons like the one above.

Granted, the market ascended way too quickly. But it also descended way too rapidly. We should expect a “sell-off” if for no other reason than a 7-month bullish stampede is bound to meet some resistance.

What’s more, if investors have learned anything from the last few years, an economic segment’s direction may not even reflect earnings at all. For instance, while most companies are busy selling less and/or turning smaller losses from one year ago, Zacks explains that the insurance industry is likely to impress with industry growth. Does that mean you should jump into the KBW Insurance ETF (KIE)?

Fundamental analysts might say that KIE was at 43.68 at this time last year, so fair value might be closer to 48. (It closed today at 36.) Yet a technical analyst need only note that you’d have to look far and wide to find an unleveraged ETF that is 15% above a 50-day moving average and 42% above a 200-day trendline. Rare are the moments in history when economic segments are more than 10% above 50-day MAs as well as 20% above 200-day MAs!

From my vantage point, the KBW Insurance ETF (KIE) is due for a “larger-than-broad-market” selloff between 10%-15%, regardless of earnings growth. At best, if key companies in the index revise earnings estimates higher for 2010, KIE could outperform the broader market in a year-end, post-pullback push.

Another big area for concern? Domestic REIT ETFs. Vanguard REIT ETF (VNQ) is 20% above a 50-day moving average and 38% above a 200-day moving average. This is literally 2x the elevation of the S&P 500… and the S&P 500 is at its highest peak above a long-term, 200-day trendline since 5/1983!

Never say never on capital appreciation… but real estate investment trusts are in survival mode. Sure, few REIT ETFs are as well-diversified as Vanguard REIT (VNQ). And the 6.5% yield is attractive enough.

That said, there are plenty of delinquencies in residential mortgages as well as plenty of commercial foreclosure dangers to rattle VNQ’s cage. In the near-term, it seems prudent to wait for the pullback before allocating a portion off your capital.

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”, via podcast or on your iPod.

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