Rally ETFs: Best Sector Bounces Off the November Bottom

Most people thought that the markets couldn't get much worse than the lows of October. Most were wrong.

In November, the S&P 500 hit brand new closing lows of 751... just 4 short trading days ago. The top-to-bottom decline for the benchmark had reached a staggering 52%.

So what accounts for one of the largest Thanksgiving run-ups in market history? Sure, we received greater clarity on the Obama economic team. Granted, we received word of additional bailouts for Citigroup (C) as well as holders of mortgage-backed securities.

Nevertheless, the real reason for the bounce has more to do with the severity of the decline, bargain buying and the "hopeful possibility" that bad news may already be accounted for. After all, the actual numbers on unemployment, housing and earnings are about as dismal as dismal gets.

And there's more. Hedge funds are still in the process of liquidating to meet client redemption requests. Tax-loss selling may occur right on up to the last days of December. The fate of the auto-makers is still unknown. States as critical as California are running record budget deficits. Lastly, the yen carry trade is still unwinding.

The greatest likelihood for the next few months is a wide range of Dow 7500-9500. At least that is the hope... that Dow 7500 is as low as the U.S. market sees fit to fall.

For now, however, we can give thanks for the run-up. And we can take a quick gander at the percentage gains by economic segment:

				Approx T-Giving Rally
SPDR Financials (XLF)					26%
SPDR Energy (XLE)					25%
SPDR Discretionary (XLY)					22%
SPDR Materials (XLB)					15%
SPDR Technology (XLK)					14%
SPDR Utilities (XLU)					12%
SPDR Industrials (XLI)					11%
SPDR Staples (XLP)					7%
SPDR Health Care (XLV)					4%
S&P 500 SPDR (SPY)					17%

There aren't a heck of a lot of surprises here. What fell the hardest in the November crash? Financials, Resources and Consumer Discretionary. That's where you'll get your bear bounce.

Yet until there's a genuine belief that the credit markets are operating, that major banking institutions aren't on the verge of collapse, it's difficult to get behind the broad-based financial truck. Every time one does, he/she seems to get run over.

A less risky way to get into financials is through preferred shares in the iShares Preferred Index (PFF). The yield is north of 10%. And as long as the U.S. government sees fit to purchase preferred shares from banks in exchange for bailout dollars, PFF would benefit the investor with both yield and potential appreciation.

Energy (XLE) would appear far less risky, as well as representative of deep value. Yet the possibility of a sustained recession with oil hanging around $50 for many years could hinder the segment. Further, it's conceivable that the Dems will favor taxing "Big Oil" to solve some of the nation's deficit problems. It follows that small oil/nat gas exploration via the PowerShares Exploration Fund (PXE) might mitigate some of the risks in resources.

If there's one surprise in the performance table, it has to be Utilities (XLU). In a market like this, you might have expected rally gains to be similar to other defensive segments, like health care and consumer staples. Instead, the double digit percentage leap is likely attributable to a hearty 4.2% annual yield and an Obama pledge to boost infrastructure spending.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Morris Johnson:]

Funny you tell us that things are so bad, I netted very close to $10,000 last week, day-trading, playing mostly Inverse ETFS. Buying several call option contracts in the money, when the market is down and the ETFs are rapidly moving up.

You don't dare to blink your eyes, but if you are quick enough and careful enough, and don't get greedy, there is money to be made even now.

Morris Johnson

2008 Nov 27 02:37 PM

[Alan Young:]

"And as long as the U.S. government sees fit to purchase preferred shares from banks in exchange for bailout dollars, PFF would benefit the investor with both yield and potential appreciation."

How so? The yield of PFF's existing holdings is fixed; appreciation of trading value comes when there is widespread confidence in the banks' ability to pay all their obligations. Since it increases the number of shares on which dividends must be paid, government investment is not likely to bring that day closer.

2008 Nov 27 04:06 PM

[canb888:]

Don't know if you would classify TAN as an ETF. This solar ETF did come up 48% from it's October lows, even more than your top XLF's 26%, but did not make it into your list. Why?????/

2008 Nov 28 02:43 PM

[canb888:]

Sorry, it was November lows.

2008 Nov 28 02:44 PM