Individual Securities At 52-Week Highs Offer Clues About Which ETFs Deserve Consideration

by: Gary Gordon

Forget the idea that the economy will contract in upcoming quarters… at least for a moment. And put aside the idea that housing prices have yet to bottom out. Instead, let’s focus entirely on the price movement of a premier benchmark in this year’s stock market correction.

Specifically, U.S. stocks in the S&P 500 fell from a May 2 intra-day peak of 1370 to an August 9 intra-day low of 1101, shedding a confidence-shaking -19.6%. That’s not quite enough damage to constitute a bear. Nevertheless, it is a 3-month period with very few fans beyond the short-selling crowd.

By the end of August, however, the large-cap index had clawed its way back to 1230. What’s more, the price of the S&P 500 tested the 1230 area for several days, but simply couldn’t break on through to the upside.

What makes this worthy of note? Resistance has been strongest at a point where the price is -10% from the May 2 intra-day high. It follows that institutional traders have outlined a trading range for the S&P 500 (1233-1096) whereby the markers constitute the very definition for a correction (1233) and/or a new bear (1096).

Unfortunately for some, there’s no reason to expect a definitive market trend any time soon. Hedge fund movers and shakers, high-frequency trading enthusiasts and mutual fund managers (via redemptions) are likely to keep everyone guessing in September. It follows that you should not be looking to add much risk right now.

That said, individual securities are giving indications about ETFs you may still consider. For example, on Thursday, September 8, Coca-Cola (NYSE:KO), Colgate Palmolive (NYSE:CL) and National Beverage Corp (NASDAQ:FIZZ) each hit new 52-week highs. An ETF investor may choose to tap SPDR Select Consumer Staples (NYSEARCA:XLP), or even a niche fund like PowerShares Dynamic Food & Beverage (NYSEARCA:PBJ).

Although gold stocks have a weak correlation with the precious commodity itself (0.35) over the past year, miners have been coming back to life. Some credit the increase in dividends; others explain that gold’s dollar value appreciation inevitably impacts producers in a positive way.

Goldcorp (NYSE:GG), Yamana Gold (NYSE:AUY), Newmont Mining (NYSE:NEM) and Barrick Gold (NYSE:ABX) all hit 52-week pinnacles. Without question, the activity is benefiting Market Vectors Gold Miners (NYSEARCA:GDX).

Lastly, the Fed’s explicit guidance for 0% rates into 2013 has created a mad scramble for yield. Nearly half of the new 52-week highs on the NYSE are preferred stock shares, including Public Storage Preferred (PSA-PE), Gabelli Dividend & Income Preferred (GDV-PA) and Alabama Power Preferred (ALP-PN).

Although there are 3 suitable ETFs for an aggregate ETF for the preferred shares space, the same dilemma that existed in 2008 exists in 2011; that is, roughly 75% of all preferred shares come from the financial company arena. For instance, sift through the top holdings of the iShares Preferred ETF (NYSEARCA:PFF) and you will find issuers such as Deutsche Bank (NYSE:DB), HSBC Holdings (HBC), Merrill Lynch and JP Morgan Chase (NYSE:JPM).

Personally, I see J.P. Morgan Chase preferred shares as golden. Yet Merrill Lynch? With Bank of America (NYSE:BAC) receiving (requiring?) capital from Warren Buffett (BRK.? And German bank exposure to European sovereign debt doesn’t make me fawn over Deutsche Bank.

In essence, with so much exposure to financial companies, you may not want to put up with the volatility of a preferred stock ETF at this time. Individual issues that yield hunters may like include utilities like Constellation Energy (CEG-PA) and DTE Energy (DTE-PA).

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.