ETF Expert

The current cyclical bull market has been led by technology and materials. Granted, the turnaround in financial stocks and a weak U.S. dollar fanned the flames. Yet it was genuine value in prominent tech companies as well as China’s government-stimulated pursuit of resources that fired up the global economy.

Although there have been a few hiccups in the 8-month rally — a 7% decline in June/July for the overall U.S. market and a 5% drop in October/November — a popular trading tool has deftly identified buying opportunities. Specifically, with the long-term trend of the market being bullish, “oversold” Relative Strength (RSI) figures have marked profitable entry points.

Consider the circumstances for the Global Materials Fund (MXI). Each time that MXI has fallen below its RSI mid-point of 50 – once in each of the months of September, October and November — investors with cash could have entered at an attractive price. (Note: MXI could have been purchased near $52, $53 and $54 respectively, while it currently trades closer to $62.)

The Relative Strength Index, or RSI, essentially compares the magnitude of an ETF’s recent gains to the magnitude of its recent losses. Subsequently, it regurgitates that info into a number ranging from 0-100.

During a bull market uptrend, when buying the dips is desired, a RSI below 50 often affords one the possibility of buying “lower.” This has certainly been the case with Global Materials (MXI) as well as the domestic sector via the SPDR Select Materials Fund (XLB).

Of course, there’s going to come a time when the cyclical bull rally ends and a new bear begins. One won’t want to be purchasing stock ETFs just because a RSI reading dipped below 50. You need to keep an eye on long-term trendlines as well as use stop-loss orders.

If a Materials ETF has fallen below a 200-Day MA, the chances of a bear market downtrend occurring would be pretty strong. Don’t ignore the warning signs!

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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