Price Breadth Suggests that Financial ETF Exuberance May Be Short-Lived

Over the last 10 trading days, the ETFs with the best price breadth included financial segments (e.g., insurance, real estate, etc.) as well as commodity companies. Over the last 250 trading sessions (i.e., 1 year), however, the ratio of net advancers to net decliners was most favorable to broad-based energy and/or oil exploration. Financial ETFs over 250 days actually had more net decliners than net advancers.

What might different short- and long-term trends be telling us about the market’s strength? For one thing, if the cumulative totals of advancing-declining stocks in the financial ETFs are an effective gauge, then financial stocks are not free from the muck. The shorter-term A/D line for financial ETFs may be moving up, but the long-term A/D Line is still down.

Price Breadth Disparity Between 10-Day A/D Net % and 250-Day A/D Net %
				10-Day Moving Avg.			250-Day Moving Avg.
iShares DJ US Insurance (IAK)				20.7%			1.0%
Market Vectors Steel (SLX)				12.3%			2.7%
SPDR Select Financial (XLF)				11.4%			-0.9%
iShares DJ Real Estate (IYR)				11.0%			-1.1%
SPDR Energy Select (XLE)				-0.8%			3.5%
PowerShares Energy Exploration (PXE)				-1.7%			3.3%
iShares GS Natural Resources (IGE)				0.7%			2.5%

We may feel a little more secure about energy, energy exploration and commodity-based companies. Even though commodity prices have risen sharply more on China’s stockpiling and less on actual demand/consumption, there’s nothing to say that China won’t continue to hoard. The Chinese government knows what stimulus to use to employ its citizens on infrastructure projects and they’re committed to acquiring more of the world’s resources.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[CLH:]

I will take the opposite side. I believe commodities are overpriced and headed down. Financial and insurance stocks never went up after 2000 and were driven down by panic last year. They have a lot of upside yet.

Sep 03 08:38 AM

[Windwood Tr...:]

Gary's analysis rings true. Financial stocks were driven up simply because the artificial valuations created a financial base that didn't exist. When it came to pony up they couldn't, sub-primes took them South since the lenders couldn't pay and the greedy goobers went crying for Uncle Sap to come to the rescue. The rating agencies were pressured to create ficticious values and make make the sow's ear to look like a silk purse. I doubt that there will be a repeat of that fiasco.

Commodities eventually move to the levels market economies set by supply and demand and the Chinese currently spot value and opportunity where it exists. They are aware of their needs, have the capital to stockpile the basic stuff and make infrastructure capabilities and overseas investments to assure a future supply.

You can do that if the politicians hadn't spent the last decade squandering their country's future like in some countries.

Sep 03 09:30 AM

[Thomas Smic...:]

I "prefer" the preferred ETFs.

At least until we come to the realisation that our $12 trillion in debt is due. TIPs foreign and domestic, anyone?

Sep 03 11:01 AM