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Hao Jin, LinkedIn (1 click)
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75% Chance That The Stock Market Could Be Lower By Year-End

Summer is over and smart money is returning from the beach. The following chart shows the S&P 500 (SPY) performance over the last 20 years. If the S&P 500 goes up in the trading week following Labor Day (Tuesday to the following Monday), the trend will follow for the rest of the year. Conversely if the S&P falls in that week, then it will fall for the rest of the year. Over the last 20 years, this trend happened 15 times.

Year

Labor Day Week

Rest of the Year

Whole Year

2010

1.8%

12.1%

12.8%

2009

3.0%

6.3%

23.5%

2008

-1.6%

-28.8%

-38.5%

2007

-1.5%

1.1%

3.5%

2006

-0.9%

9.1%

13.6%

2005

1.9%

0.6%

3.0%

2004

1.1%

7.6%

9.0%

2003

2.3%

7.8%

26.4%

2002

-1.4%

-2.6%

-23.4%

2001

-3.6%

5.1%

-13.0%

2000

-2.1%

-11.3%

-10.1%

1999

-1.0%

9.3%

19.5%

1998

5.7%

19.4%

26.7%

1997

3.5%

4.2%

31.0%

1996

1.8%

11.6%

20.3%

1995

1.8%

7.3%

34.1%

1994

-1.0%

-1.5%

-1.5%

1993

0.2%

1.0%

7.1%

1992

2.0%

2.5%

4.5%

1991

-1.7%

7.3%

26.3%

S&P 500 closed at 1,162 on Monday, September 12, 2011. It was at 1,174 on Tuesday's opening (September 6). The -1% performance in this year's Labor Day trading week means that the market could go lower by year-end.

With that in mind, which sector offers attractive yields, remains a safe haven and tends to shine in times of low interest rates, low growth and a weak economic environment?

Sector ETFs

Select Sector SPDRs are ETFs that divide the S&P 500 into 9 sectors. The following data shows each sector ETF’s dividend yield and beta:

Fund Name (Ticker)

Yield

Beta

Consumer Discret Select Sector SPDR (XLY)

1.6%

1.13

Consumer Staples Select Sector SPDR (XLP)

2.8%

0.58

Energy Select Sector SPDR (XLE)

1.6%

1.00

Financial Select Sector SPDR (XLF)

1.5%

1.47

Health Care Select Sector SPDR (XLV)

2.0%

0.68

Industrial Select Sector SPDR (XLI)

2.2%

1.23

Materials Select Sector SPDR (XLB)

3.9%

1.24

Technology Select Sector SPDR (XLK)

1.5%

1.03

Utilities Select Sector SPDR (XLU)

4.0%

0.56

Utilities Sector

Among the 9 sectors, the Utilities Select Sector SPDR (XLU) has the lowest beta (0.56) and the highest dividend yield (4%). It consists of companies involved in water and electrical power and natural gas distribution industries.

The following chart (click to enlarge image) from ETFReplay.com shows last 10 years’ yield history for XLU (in blue) vs. SPY (in yellow).

Worst Case Scenario

The following table compares the iShares Barclays 7-10 Year Treasury (IEF) vs. XLU. There is not too much downside given the strong valuation support for the utility sector. If XLU declines to its 5-year-low again from today’s price, it could lose 28.5%.

Stock

Today's Price

5-Year-Low

Worst Case Scenario

IEF

$105

$80

-23.80%

XLU

$33

$24

-28.50%

Conclusion

We need the maximum return we can get from our investment dollars in order to compound the giant sum of money required to support us through our retirement. However, if we go for the big returns, we inevitably risk taking a big hit that substantially wipes out our savings. On the other hand, if we forgo the high returns by avoiding stocks, our nest egg never grows, according to Ben Stein & Phil Demuth, authors of “The Little Book of Bullet Proof Investing”.

Even though Utilities Select Sector SPDR (XLU) is far from “super safe”, the sector offers decent dividends and carries a relatively high degree of safety in a sideways market and flat economy. The utility stocks are less volatile than the rest of the market, and their earnings make this ETF resilient even in times of uncertainty and rollercoaster ride markets.

Note: Data is from CNBC and Yahoo Finance and is valid as of September 12, 2011.

Source: XLU: A 'Bullet Proof' High-Yield ETF