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3 Reasons Why Stock ETF Investors Should Tread Lightly

27 October 2011 at 3:28 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

In the dark days of late September/early October, China¬†hinted that it was nearing the end¬†of its monetary and fiscal tightening campaign.¬†At the same time, leaders in the European Union¬†demonstrated several “come together” moments that removed the¬†probability of¬†an imminent¬†collapse. And virtually every fundamental measure of “value” favored stocks over¬†alternative assets.

In fact, I extolled the virtues of a Q4 stock rally in numerous features:

3 Reasons For Increasing Your Allocation To Stock ETFs in Q4 – October 24
7 ETFs For The “Technical Turnaround” In Market Sentiment – October 10
“Cash Dash” May¬†Suggest That Pan-ETF Selling Is Near Completion – September 28¬†

That said, the extreme nature of the bounce higher screams for an examination. Is the coast really clear? Will Q4 continue to surge, trade sideways, or even turn bearish once more?

From my vantage point,¬†scores of stock ETFs will finish 2011¬†much higher than they finished today. Nevertheless, you’ll want to be judicious¬†in adding¬†more risk; that is,¬†you’ll want to wait for inevitable selling pressure to resurface.

The¬†“easy gains” have been made. Here are 3 reasons why you now need to be¬†patient¬†before¬†adding more to your¬†Stock ETF¬†plate:

1. European Banks Don’t Trust Each Other… Yet. Since July, I have talked ad nauseum about rising 3-month LIBOR rates.¬†Well guess what? They’re still going up.

For example, in August 15 commentary, I talked about the fact that LIBOR had jumped 17% from 0.25 to 0.293. By September 15, LIBOR had reached 0.34 and by October 15, 3-month LIBOR reached 0.40. Today it is pushing 0.43.

3-Mo LIBOR at 0.43

The increased cost for European banks to borrow from one another has risen 72%. A plan to recapitalize financial institutions may not mean a hill of beans if¬†those institutions don’t trust one another.

2. Earnings Haven’t Yet Driven The Market Higher. The researchers at Bespoke detailed the average return¬†for individual stock performance on the session following the earnings report.¬†The result? -0.21%. In other words,¬†with 62% of corporations beating revenue projections and 71% exceeding earnings estimates… nada.

It follows that investors aren’t really seeing “value” in stocks as much as they are¬†reacting¬†to “good news” out of Europe. Now that the Europe news is¬†priced in — more or less, stocks may need a separate catalyst.

China definitively announcing an end to tightening and/or offering up stimulus could bolster SPDR Metals and Mining (XME) as well as Australia (EWA) and South Africa (EZA). A pleasant trajectory in the upcoming employment data may boost Vanguard Consumer Discretionary (VCR).

3. Profit-Taking And Tax-Loss Harvesting. Even as the S&P 500 rocketed 3.4% in the singular Thursday session, volume was only average for the S&P 500 SPDR Trust (SPY). In fact, institutional investors¬†sold $521,000,000 of SPY into the day’s strength.

Considering the sheer size and scope of SPY, this isn’t a monstrous hit to the net assets. Nor would I regard it as a bearish sign. However, it may indicate a high level of interest in taking profits. It should also give folks reason to expect a higher-than-normal amount of volatility for November and December, as there will be plenty of investors needing to harvest their 2011 tax losses.

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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