Short Covering and ETFs: Profiting from Materials, Energy, Chip Sectors

When you talk to enough people -- advisers, individual investors, day traders, blue and white collar professionals -- there's a general distrust of lower oil prices. "Maybe they won't go through the roof like before," they collectively say, "but prices are definitely going to go much higher."

The collective consensus, albeit quite informal, is that we're headed for higher food prices, higher oil prices and higher commodity prices. There isn't much acceptance of a long-lasting period of deflation; rather, people expect inflation, whether or not that's due to a June 2008 hangover.

And you know what... I tend to agree. Any sort of signs of economic recovery anywhere on the world stage increases demand. Moreover, the cutting back of supply that's taking place in the present recession is likely to overshoot dramatically, further pressuring the relationship between what's available and how many are demanding it.

Yesterday for instance, the market pulled off of its 1996 lows of S&P 696 due to a stronger-than-expected reading on the Chinese manufacturing sector and expectations of additional economic stimulus from the Chinese government. Is there potential of economic conditions improving in China? Will Chinese manufacturers require more energy and materials to run their plants and build their infrastructure? It all translates into the price for "stuff" climbing.

It follows that the worst performing short funds yesterday included: (a) ProShares UltraShort Materials (SMN), (b) ProShares UltraShort Oil and Gas (DUG) and (c) Proshares UltraShort Semiconductors (SSG).

(Each of these funds were down nearly 8.5% about an hour-and-a-half from the close of market on March 4. In contrast, the UltraShort S&P 500 Fund (SDS) was down about 5%.)

As I've written about in the past, rising semiconductor stock prices typically signal improvement in economic conditions. And while no stock segment may have gained ground in 2009 thus far, semiconductors have held up far better than the market at large.

It is far too early to tell if this is a sign of early confidence or merely bargain-hunting. Yet a lot of semi success does seem to depend on what and how China does.

The same can be said for the miners of metals and materials... as well as the drillers of oil and gas. If you present a bit of good news out of China, you can watch the resource-rich ETFs like Brazil (EWZ) and South Africa (EZA) surge.

One might say that a rally in stocks is somewhat expected. Call it a bear rally, a bear bounce, short covering, audacious bargain hunting or all of the above. The markets don't go down day after day without some sort of relief.

Yet the bigger implication of yesterday's rally is what we might expect to do well when a true blue bull market returns. It seems possible that economic optimism may breed the most confidence in resources and resource-related stocks. That's something to keep an eye on going forward.

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

[blucrab:]

does anyone expect a peak of last years performance of SMN?

IF SO- HOW HIGH?

Mar 22 11:48 AM

[Andreas:]

equilor.hu/en 1 account 21 markets say bye bye to US Brokers

Apr 02 02:28 PM