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Three Trends That Favor Non-Cyclical ETFs In April

02 April 2013 at 11:42 am by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

Investors may be heartened to discover that the Cyprus bailout is back on track. I am not sure how that will prevent Europeans in Italy and Spain from slowly moving their money out of beleaguered banks, but that is an issue for another day.

Right now, broad-based U.S. large cap stocks are trading at record levels yet again. And as Barron’s recently penned, “Why Worry, Be Bullish!”

After several decades in financial services, I find it ironic that pundits ever self-select into a bull or bear camp. Investing does not require predicting… it requires control. One needs to limit costs to increase his/her portfolio returns. One needs to eliminate the possibility of a big loss in any position. And one needs to minimize the effect of his/her emotions on decision-making.

Granted, I may have an opinion or a combination of opinions whereby others might label my current stance. However, I do not think in terms of bear or bull. I think in terms of gathering information — fundamental, technical, historical, economic, political, contrarian, anecdotal. I use that “intel” to decide what and when to purchase. Equally important, I have a plan with unemotional, mechanical tools (e.g., stops, hedges, trendlines, etc.) to determine exactly what and when to sell.

I continue to stick with consumer staples, pharmaceuticals, broad-based health care, telecom and a number of utilities — the meat and bones behind a safer growth and income approach. And the fact that I continue to recommend holding cash to buy more low-risk non-cyclical assets for the next 5% pullback probably places me in a camp of bashful bullishness. If that’s the way others see me… so be it. That said, the evidence at the present moment does not support going boldly into cyclical “faves” like technology, energy or industrials.

Here, then, are 3 trends that favor non-cyclical ETFs over their counterparts:

1. Manufacturing Slowdown is Dampening the Industrial Sector. Nearly every week, the media inundate us with the Dow 30’s latest record or the S&P 500’s most recent conquest. Beyond the price movement, however, actual economic data is less encouraging. For instance, the year-over-year growth rate for factory orders has slowed considerably over the last 2 years. Granted, the Federal Reserve uses weak economic info to justify its ongoing bond purchases. That said, it may be getting harder to justify owning funds like SPDR Select Sector Industrials (XLI). The XLI:S&P 500 price ratio shows how the industrial sector is rapidly falling out of favor.

XLI-$SPX Price Ratio

2. How Footloose And Fancy-Free is the Almighty Consumer? It is true that General Motors, Ford and Chrysler are selling vehicles. By many standards, they are selling a ton of them. On the flip side, only Ford managed to exceed the sales estimates by analysts. And perhaps things are bit less rosy at Daimler, Toyota and Honda. After all, First Trust Global Auto (CARZ) has been rather erratic in 2013 and has struggled mightily in the last month.

CARZ One Month

3. Maybe Sequestration Will Hamper Corporate Earnings After All. We haven’t heard much about how the automatic spending cuts have or have not affected corporate profitability. If anything, some companies are likely to use the sequester as an excuse. Take Delta Airlines (DAL), for instance. Executives are already reporting that their revenue growth slowed due to U.S. government cuts. Seems like a stretch to me. However, if spending does slow, it tends to slow in discretionary arenas, not toilet paper and toothpaste procurement.

DAL 50 Day

The slowdown in manufacturing, the potential for subtle changes in consumer spending habits and the possibility of under-performing cyclical companies are three reasons that I prefer non-cyclicals in the 2nd quarter of 2013. One of the strongest representatives? WisdomTree Equity Income (DHS). Even with this exchange-traded fund, however, I prefer to wait until the broader markets pull back 5% from a recent peak.

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Disclosure Statement: ETF Expert is a web log (”blog”) 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.

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