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These 3 ETPs Can Tell You When To Bring Cash Off The Sidelines

29 August 2011 at 3:41 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Hurry! Hurry! Place your bets on the chances of another recession — 25%, 33%, 50%, 66%, 100%!

How gloomy are some folks? Perma-bear David Rosenberg of Gluskin Sheff & Associates believes that a recession is a near certainty (99%), citing the weakness of the consumer and the double-dip in housing. Meanwhile, John Hussman, long-short billion dollar fund manager, expresses 100% certainty in eventual economic contraction. He describes a combination of circumstances (e.g., S&P 500 lower than 6 months prior, year-over-year GDP below 2%, widening spreads on corporate debt, etc.) that have always preceded prior recessions.

Whether it is¬†Roubini, Rosenberg or Hussman, you’re going to find your share of¬†naysayers. What may be more critical to investors, however, is where they should invest their money right now.

U.S. treasury bonds? The iShares 7-10 Year Treasury Bond (IEF) is near an all-time record high. Even a recession may fail to push 10-year yields any lower than 2%, stifling future price gains and capping cash flow at or below the rate of inflation.

What about precious metals? Profit takers pushed¬†SPDR Gold (GLD) down 10% last week. And as much as I’ve profited over the years from the yellow metal, I’d need to see GLD come back to its 50-day moving average of 159.9.

GLD 50

Recession or no recession, investors will not be able to make¬†too much more in fear-based “faves.”¬†It follows that they¬†may be better off¬† with a greater-than-normal allocation to cash, until ETF signs point to opportunities in stocks or commodity-based investments.

Here are 3 key ETP indicators for bringing cash out of the cookie jar:

1: Copper. Back on March 9, iPath DJ Copper (JJC) gave me an early indication that the bull market¬†might be taking a breather. (Review “Copper ETN May Be Indicating A Pause For The Bull Market.”)

Since that time, JJC has struggled. In June, its 50-day moving average crossed below its 200-day moving average, a bearish phenomenon called a “death cross.” Until¬†the 50-day trendline of iPath Copper (JJC)¬†rises above¬†its 200-day, investors¬†might want to¬†refrain from¬†gambles on¬†economically sensitive sectors like Industrials and Consumer Discretionary.

JJC 50 200       

2. Preferred ETFs. In previous years, if you wanted a relatively lower-risk, yield-oriented investment, you opted for preferred shares. Preferred shares are hybrid vehicles, paying fixed dividends like bonds and offering the potential for a modicum of capital appreciation like common stock.

Like any great car, however, Preferred ETFs are not without their design flaws. The vast majority of them (75%) have been issued by financial companies. It follows that as long as the world fears a global meltdown from¬†European debt contagion — a meltdown¬†not unlike the 2008 subprime-led collapse — iShares S&P U.S. Preferred (PFF) will let us know.

PFF has rebounded from its early August nightmare, but remains well off its 2011 peak. Look for 3 successive days where PFF closes above its 200-day MA, currently at 38.16.

PFF 200

3. iPath VIX S&P 500 Short Term Futures(VXX).¬†Traders are long “fear” when the price of VXX¬†is above its 200-day trendline.¬†March witnessed uprisings in the Middle East and an unprecedented natural disaster in Japan. May and June demonstrated the global economy was hitting a “soft patch.” And yet, VXX didn’t rise above its 200-day until the initial week of August.

A trader’s hedge¬†with VXX is a ‘bet”¬†that the CBOE S&P 500 Volatility¬†Index (VIX)¬†will rise substantially in the next month or two,¬†and that investors will likely sell¬†stock assets.¬†Until traders exit¬†the “volatility bet” with¬†VXX falling below its 200-day moving average (currently at 30.50),¬†your extra cash may very well be safer on the sidelines.

VXX 200

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can follow me on Twitter @ETFexpert.

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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