ETF Expert

I may have been one of few voices in the media that didn’t explain last week’s market slump as a function of Bernanke’s confirmation uncertainty. In fact, in my ETF Risk Alert service, I talked about how 80% of companies may be beating their earnings expectations, but that those profits have not grown fast enough to justify current share prices.

I also used the chart of the iShares China 25 Index (FXI) below. Suffice to say, if the world’s most successful economy has a popular benchmark in a technical downtrend, the rest of the world is likely to get spooked.

Indeed, it was China’s reflation of demand for materials, as well as the country’s call-out for industrial conglomerates to advance infrastructure projects, that turned world stock markets higher last March. It follows that the possibility of significantly tighter Chinese monetary/fiscal policy is most responsible for the profit-taking.

While it’s true that virtually all stock assets are highly correlated, it is worth taking a look at where bearish investors have been placing their “sector” bets here in the U.S. markets.  Are investors worried about the battered consumer, and therefore “shorting” consumer stocks? Do they feel that financial companies have gotten ahead of themselves, choosing to short the banks, brokerages and insurers?

The “short interest ratio” measures how many investors are betting on a big-time drop… and it has risen 45% for the S&P 500 since the cyclical bull market began in March. Moreover, Bloomberg BusinessWeek uncovered only 1 of 10 major economic sectors with less short interest in December ‘09 from March of ’09 (i.e., telecommunications).

The first thing that one should take into account is that the order from highest to lowest “short interest” has not changed throughout the 10-month cyclical bull. Investors are more apt to bet against industrial companies, financial corporations and consumer discretionary outfits. Similarly, there’s less overall short interest in tech, telecom and energy.

That said, with the average short interest increase on the S&P 500 since March at 45%, I’d pay close attention to the surging short interest in Industrials and Materials; they’re both up 89% since March.

For me, this only confirms what the investing public fears about China’s ability to carry the world out of its collective funk. There’s a perception (a.k.a. fear) that China will tighten its belt too much. If perception becomes reality, decreased demand for either raw materials or the conglomerates that fortify infrastructure could result in lower profits and lower share prices.

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. If you’d like to subscribe to ETF Risk Alert, click here.

Tags | "etf and shorting", "etf bear bets", "etf industries", "etf shorts", "etfs and bears", "industries and etfs", "short interest ratio and etf"