ETF Expert

InTrade.com currently predicts a 70% chance that Republicans will control the House Of Representatives after the 2010 elections. The site’s prediction market platform has Republican chances of claiming the Senate at approximately 28%.

Indeed, many expect big changes after the mid-terms. In fact, there’s a growing sense of giddiness about how high the markets might climb… particularly, if the entire make-up of Congress shifts.

I, on the other hand, am not so sure. The broader market has already rallied on the notion that we’ll see two years of intense gridlock; the fact that pro-business Republicans will make inroads is widely anticipated already. It follows that the markets may sell off on anything less than a brand new ”House.” And, additional November/December gains may require the longer shot of a complete takeover in the Senate.

Right now, however, there’s specific sector weakness in the exact areas where government has intervened the most. According to ETFScreen.com, the Sector ETFs with the lowest relative strength percentile rankings are Financials (XLF), Health Care (XLV) and Energy (XLE).

Perhaps investors perceive that the next Congress won’t/won’t be able to ”roll back” universal health care, FIN REG and fines/fees/regulations in the energy space. Or perhaps investors still fear Democratic control of the two houses such that… more intervention is yet to come.

The 3 belaguered sectors mentioned above haven’t just been adversely impacted by legislation… they’ve become progressively weaker over the last 3 months. The uncertainty of the new laws, the uncertainty within the legislative documents themselves and the uncertainty of how the government will enforce the new laws is killing XLF, XLE and XLV. (Note: These sector ETFs effectively sit in the lowest quartile of ETF investment alternatives.)

In contrast, Utilities (XLU) are already highly regulated. The consistency of its 4%+ dividend income stream is particularly attractive relative to 10-year treasuries yielding 2.6%. XLU is trending higher, testing 52-week highs and is increasing in relative strength. Taken together, this stock ETF has secured a space in the highest quartile of ETF investment alternatives.

Similarly, in our current jobless recovery, credit conditions for businesses have improved, interest rates are accommodative and M&A has picked up dramatically. Indeed, the biggest conglomerates in the Industrials ETF (XLI) are increasing top-line revenue and bottom-line profits. Granted, no economic sector is immune from a struggling consumer or an incoveniently intervening government. Yet XLI is demonstrating that it may be able to thrive in an environment where the more gridlock… the better.

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