The nascent market downturn has picked up steam of late, leading me to begin to think about ETFs to avoid for the near-term. While some will say the issues offer buying opportunity on already marked decline, I suggest not attempting to catch the falling knife just yet. There remain longer term questions to be answered about the global economy and recent signs of underlying weakness.
Avoid Oil Complex Trackers
The one-year chart presents what seems like stability for the securities here. The USO and OIL are well off their highs of last year now, when the economy was making marked improvement and it seemed global demand was building again. However, since then, questions have surfaced about oil supply and pricing given American reserve discovery and development. Obviously, recent weather has eaten into natural gas reserves, but that is a seasonal issue that I believe commodity traders are not yet ready to call the new normal. As a result, it's not a serious long-term driver currently.
The oil market securities began to recover from late 2013 lows, but have this year been struck again by weak U.S. economic data found in the monthly Employment Situation Report nonfarm payroll shortfall. Add to that, weakness seen in economies globally, especially in China recently, and the oil outlook comes into question. Emerging markets are suddenly seeing crisis as well, so oil has a great weight against it, and as a result, investors will want to avoid the OIL and USO.
Emerging Market Weakness
Don't try to catch the falling knife in the emerging markets today. While the one-year chart of the iShares MSCI Emerging Markets ETF (EEM) seems to offer a buying opportunity, it's too early to add to risk today.
Turkey is in the midst of a crisis and other markets are likely to feel the heat near-term before things settle. Last week, all of Europe was deeply red and most of Asia. In Sao Paulo, the Bovespa was off 2.8% last week and is down 7.2% on the year through Friday. In Moscow, the RTS is down 5.5% year-to-date and fell 2.3% last week. India's Sensex is only off fractionally on the year, but the Hang Seng is down 3.7%. Greek stocks were down 7.1% last week. We can see, then, that risk is definitely off. It's not for the brave to buy now, it's for the fearless. Therefore, investors will want to avoid the emerging market trackers including the iShares MSCI Emerging Markets ETF .
Avoid Consumer Sensitive Issues
The retailers contributed greatly to this year's selloff. Despite solid recent retail sales data, too many individual retailers are reporting on a thrifty U.S. consumer. Retailers Best Buy (BBY) and Sears (SHLD) had some extremely sour news to report this quarter and struggling J.C. Penney (JCP) announced some store closures. We're dealing with an overly saturated retail environment that cannot support current capacity in my view. While some names might still do well on individual drivers, the group on the whole is out of favor, in my opinion.
The softness is clearly seen in the tail end of the chart here for the Consumer Discretionary Select Sector SPDR (XLY) and the SPDR S&P Retail ETF (XRT). Today's Consumer Confidence Index improvement was contrary to recent trend, and offered lift for these two issues today. However, I think investors should not look past other indicators which have reflected problems recently. Weekly same-store sales data have been weak; while some of that is on weather, it's coinciding with a failing weekly measure of consumer comfort published by Bloomberg and the Reuters/University of Michigan measure of sentiment.
While in the line of fire, these ETFs are dangerous to buy today, and so I suggest continuing to avoid them here. The factors that have come against the broad reaching issues are longer term in nature and so questions about the global and U.S. economies need to be answered before sustainable change occurs. While we may see improvement on a day-to-day basis, until employment trends are repaired and the China question is answered, I cannot see good reason to approach these five issues today. Avoid them for now.