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3 ETF Signs Warn Investors About A “Highly Probable” Correction

11 May 2011 at 3:08 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Since the beginning of earnings season, I’ve been discussing the rotation into defensive stock sectors. Now, nearly everyone¬†seems to be writing something about it.

That said,¬†you’ll find three links to¬†my “defensive sector” commentary below. In the articles, you’ll find observations pertaining to¬†changes in everything from relative strength to¬†volume¬†breadth, valuations to new 52-week highs.¬†

May 3, 2011: “Sector ETFs: What The New Leaders Are Telling Investors
April 28, 2011:¬†”Volume Breadth Favors Non-Cyclical Defensive Sectors
April 15, 2011: “In Earnings Season, Safer Sector ETFs Are Winning

Still, throughout the last month,¬†I refrained from making¬†bearish or bullish prognostications. Rather than holding firmly to a “this-must-occur” bias, I let the information guide my decision-making. More specifically, I choose investments based on a wide variety of fundamental, historical and technical data. Then I let unemotional stop-limit loss orders¬†protect positions for a¬†large gain, small¬†gain or¬†small loss.

Of course,¬†not everyone has the patience or discipline to employ stop- limit loss orders or hedges properly. It follows that many readers simply want a “quick pick” or market direction “call.”

Rather than insist that an event is imminent or certain, when the exact opposite may be the case, I simply wish to offer ETF evidence of a probable correction. How you use the evidence depends upon your personal approach to risk management as well as your current positions. (For instance, an individual with 50% cash may be putting together a list of ETFs to buy when stock ETFs pull back significantly. In contrast, fully invested folks may want to lighten their exposure to risk assets.)

1. iPath Copper (JJC). Long-time readers know that I talk about Dr. Copper frequently. It may be one of the best indicators of investor confidence (or lack thereof) in the global industrial cycle.

Therefore,¬†your eyes should open¬†up wide when JJC falls below a¬†200-day moving average. The last time that it happened? April/May 2010… at the inception of the S&P 500’s nasty¬†-17% correction.

JJC 200

2. Vanguard Extended Duration Treasuries (EDV). “Bond king” Bill Gross, uber-hedger Doug Kass and commodities maven Jim Rogers share one thing in common. They’re all shorting U.S. treasury debt. (Ironically enough, they each appear willing to fight the Fed;¬†perhaps the end of quantitative easing has already been written on the “Wall.”)

We all know that U.S. treasury debt is undesirable… at least at these yields and¬†at these bogus ratings. Nevertheless, whenever the¬†world at large gets spooked,¬†investors still run to the perceived safety of the U.S. government.¬†The last time that the longest maturity treasury ETF — Vanguard Extended Duration (EDV)¬†– climbed above a 200-day moving average for a substantive period of time? Yep… April/May 2010.

EDV 200

3. iShares MSCI BRIC Fund (BKF). It has been called the emerging growth story. It is a simple concept. The vast majority of the contribution to global economic growth comes from the 4 majors — Brazil, Russia, India and China.

It’s one thing for the BRIC nations to collectively underperform for 6 months or 1 year. Their governments have been fighting currency appreciation, speculative bubbles, investment flow, socio-economic unrest and so forth. Yet it’s quite another thing to have all 4 of these countries struggle. ETFs like China 25 (FXI),¬†WisdomTree India (EPI),¬†Market Vectors Russia (RSX) and iShares MSCI Brazil (EWZ) are¬†individually battling to stay above a 200-day MA; the iShares¬†MSCI BRIC (BKF) is already failing to hold a long-term uptrend.

BKF 200

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can review more ETF Expert features here.

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. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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