Sector ETFs: When Bad News Becomes Good News

It's hard to imagine a more depressing number that represents economic contraction than the number presented on the first trading day of January. The Institute for Supply Management furnished the lowest monthly reading of its manufacturing index since the multi-year, "common sense" recession of the early 80's.

The manufacturing number came in far below analyst expectations, but that didn't seem to matter to the "industrials" sector. The SPDR Select Industrials (XLI) still picked up a whopping 3.6% on the day.

Similarly, the Semiconductor Industry Association said that worldwide sales of semiconductors fell 9.8% in November. Once again, this was far worse than analysts had anticipated. So guess which sector had one of 1/2/09's best performances? Yep... the iShares Semiconductor Index Fund (IGW) garnered 4.6%.

Across the board, in fact, the broader markets surged an amazing 3%. Still, sectors most adversely affected by the economic hardships of the present witnessed their stock prices climb the highest.

Some will say that the simple enthusiasm for starting 2009 gets most of the credit. After all, many people have not truly returned from the holidays. Others will say that the 3-day rally is more indicative of the transition to "soon-to-be-sworn-in" Obama.

Me? I think we're still in a trading environment; that is, I expect large intra-day and large intra-week percentage moves to continue in both directions, as many investors will take profits.

When we get bad economic news... no matter how bad... we pretty much expect it today. And investors are buying stocks on the bad news.

Conversely, when a cease-fire in Israel occurs or Obama takes office, what might normally be viewed by the markets as good news will be an excuse for profit-takers. Think about it. Will there be enormous comfort with leaving 10%/15%/20% gains on the table? On the belief that things will get worse before they get better? On the hope that recovery will occur in the 2nd half?

Don't get me wrong here... the buying opportunities are positively tremendous. I genuinely believe 2009 will be a 20%+ year for conservative growth and income portfolios. Yet I see little likelihood of volatility going away.

In other words, expect a big time roller coaster. If you don't want to take profits or stop out on small losses (i.e., trade with frequency), you'll need a big buffer from your yield/interest holdings. Here are the ones that I am using.

You can hold Utilities (XLU) and Global Telecom (IXP) for the eventual economic recovery -- one that may not fully materialize until 2010. In contrast, you should be quicker on the trigger to take gains in Energy (XLE) and Financials (XLF). They are likely to offer scores of opportunities to buy, sell, take a small profit, and then... repeat.

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.