The broader S&P 500 may not have fallen far enough to have met the technical definition of a stock market correction. Yet we shouldn’t dismiss an intra-day, high-to-low pullback of 7% as unremarkable. (For that matter, there may be more selling pressure ahead.)
On the flip side, what if the worst of the selling has passed us by? Is there a way one might locate exchange-traded investments worth purchasing?
Here’s one process of selection that may be worth considering:
1. Understand the Nature of the Uncertainties. Every pullback is rooted in fears of the unknown. The first unknown that rattled stocks off of their bullish perch was/is the Libyan uprising. In brief, investors began to fear that a prolonged rebellion in the oil-producing nation would lead to economic pain for a “crude” consuming world. Similarly, the need to contain radiation, prevent a nuclear meltdown in Japan, and rebuild an entire coastline of infrastructure created more doubts about trading partner ability to conduct normal business with the globe’s third largest economy.
2. Identify the Types of Companies That Might Alleviate Uncertainties. Fear and crises are typically overcome by opportunistic investing. Wood, coal and steel companies from Weyerhauser (WY) to Joy Global (JOYG) to Rio Tinto (RIO) are likely to have a hand in rebuilding post-tsunami Japan. Meanwhile, energy explorers/engineers/service providers from Halliburton (HAL) to Baker Hughes (BHI) tend to gain ground when there’s a premium on oil.
3. Check the “Snap-Back” for Related Sector ETFs. During panicky times, “risk-off” selling usually results in dumping everything on the stock plate. However, when opportunistic investors believe the coast may be less hazy, they’re likely to load up on sub-segments (e.g., hard asset providers, oil services, energy exploration, etc.) that lessen the uncertainties. One can see this activity by listing the sector ETFs that have bounced the highest off respective bottoms.
|7 Of The Best “Bounces” For Sector/Sub-Sector ETFs|
|Approx % Gain|
|iShares DJ Oil Equipment & Services (IEZ)||3.74%|
|Claymore Guggenheim Global Timber (CUT)||3.54%|
|SPDR Oil & Gas Equipment/Services (XES)||3.44%|
|First Trust Natural Gas Index Fund (FCG)||3.05%|
|SPDR DJ Wilshire International Real Estate (RWX)||2.50%|
|Market Vectors Hard Assets Producers (HAP)||2.42%|
|Market Vectors Steel Index Fund (SLX)||2.35%|
|SPDR S&P 500 (SPY)||1.32%|
Is there tremendous volatility in hard asset producers - from steel to wood to natural gas to coal to oil? The beta risk is a heck of lot more than you’ll get with the S&P 500. Yet taking on risk in the areas that mollify current uncertainties is a way to profit from core beliefs; that is, these are some of the segments that may benefit the most from a continuation of worldwide economic expansion.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.