Perhaps the most common question that I receive from¬†financial journalists at popular publications (e.g., Investor’s Business Daily, Smart Money, Business Week, etc.) regards ETF risk. For example, with U.S. stock assets eclipsing their January highs, and coming off a 9.2% correction, writers are asking,¬†”What do you see as the¬†next big hurdle?”
In truth, it would be easy to parrot world-renowned speakers. Pimco’s El-Arian continues to press the sovereign debt uncertainty button. Other¬†media stars will tell you that it’s all about “jobs.” I am more inclined to discuss the possibility of an unstable dollar, whether it’s rapid-fire appreciation or free-fall depreciation.
Lately, however,¬†I’ve been looking at a different barometer of stock market well-being… although¬†”different” may not be the most appropriate¬†word; that is,¬†the health of the financial sector in 2010 appears to be a major force for or against equity performance… not unlike¬†its influence in 2008.
Consider the big-time stories that you may be reading.¬†When you learn that formerly troubled names like AIG and Citigroup are¬†surging… when value investors talk about property/casualty insurers as one of the best bargains in town… when regional banks are discussed as a diversified hidden gem…¬†equities¬†across the U.S board seem to rally. In contrast, when conversation about regulatory reform heats up or¬†when¬†you hear that the government is “strongly discouraging”¬†banks from¬†raising dividend payments to shareholders,¬†the entire stock market seems to shudder.
So yes… if you ask me where the ETF risks are, I’m looking at charts like the one above.¬†The volume for¬†SPDR Financials (XLF) near the correction’s bottom in late January/early February appears to indicate¬†buyer conviction and/or capitulation. Yet, as XLF has neared its October peak from 5 months ago, volume has¬†steadily declined. In fact, XLF has not broken through its October pinnacle from¬†5 months ago.
And there’s more.
Marco Polo XTF reports that Direxion Financial Bull 3x (FAS) has witnessed nearly $770M in monthly outflows; that would represent roughly 2/3 of the total assets under management. Similarly, $500 million has moved into Direxion Financial Bear 3x (FAZ) in monthly inflow, representing as much as 1/3 of its total asset base.
On a year-long basis, I am watching the U.S. dollar. If it remains flat or slightly depreciates in value, I anticipate stock ETFs would have a good year. If it rapidly appreciates or rapidly depreciates, I would worry about equities for 2010.
In the more immediate realm, financial stocks seem to have some sway. SPDR Select Financials (XLF) really needs to set new 52-week highs. What’s more, one would have to hope that the fanatical traders of leveraged financial ETFs have got this one wrong.
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.