Bearishness In Energy And Materials Suggests A Shift Toward High Income ETFs (Podcast)

by: Gary Gordon

The Dow and the S&P 500 may have experienced the worst two-week losses since November. Still, is it really time to panic? When one considers the reality that the major averages are less than -4% from multi-year highs, abandoning stock assets seems a bit premature. That said, you may want to avoid certain investments.

For example, a wide variety of Currency ETFs have worked their way into to full-scale correction mode. The CurrencyShares Euro Trust (NYSEARCA:FXE) is 12.4% below a 52-week high whereas the CurrencyShares Swedish Krona (NYSEARCA:FXS) is 11.8% off its peak. And while a lack of interest in European sovereign debt may be to blame, the uncertainties in the Chinese economy are adversely affecting Brazil and the value of the real. WisdomTree Dreyfus Brazilian Real (NYSEARCA:BZF) is down -12.8% from a 52-week pinnacle.

Even though the U.S. Federal Reserve has steadfastly devalued the U.S. dollar through its interest rate and easing policies, Europe’s economic contraction and ongoing austerity make it difficult for currency ETFs to make appreciable progress. Similarly, until China clarifies its intentions to stimulate its own economy, the currencies of resource-rich countries from South Africa to Brazil may be stuck in the sands.

Of course, it’s not just the currencies of foreign countries that are struggling. I conducted a recent screen of stock funds where the short-term trendline (50-day MA) had dipped below the long-term, 200-day moving average on heavier-than-normal volume. The directional “losers” fit roughly into three categories: (1) resources-related stock funds, (2) European stock funds and (3) China ETFs.

Energy and materials may be having the roughest go of it. Everything from broad-based Rydex Equal Weight Energy (NYSEARCA:RYE) to SPDR Oil Gas Equipment and Services (NYSEARCA:XES) to First Trust Global Copper (NASDAQ:CU) is 20%-plus off a high point. Selling has intensified over the last five days. Worse yet, the technical picture is rather bearish.

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RYE Exp 50 200

The same disturbing trend is occurring for prominent European stock ETFs, including iShares MSCI France (NYSEARCA:EWQ), iShares MSCI Austria (NYSEARCA:EWO), iShares MSCI Italy (NYSEARCA:EWI) and iShares MSCI Spain (NYSEARCA:EWP). Even China stock ETFs - iShares FTSI China 25 (NYSEARCA:FXI), PowerShares Golden Dragon (NASDAQ:PGJ) - have seen selling volume intensify as near-term trendlines cross below long-term ones.

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FXI Exponential 50 200

For weeks, I’ve maintained the same guidance. You can weather the thunderstorms of greater-than-normal selling volume and increases in volatility (i.e., wider daily trading ranges) with a healthy shift toward yield producers and consumer staple standouts.

For instance, faith in SPDR Select Sector Staples (NYSEARCA:XLP) has rarely been higher. Its uptrend remains entirely intact and it is a mere -2.5% off of its multi-year peak.

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XLP Exponential 50 200

In the same manner, there are a wide variety of less volatile income producers that could be bought on the dips, from Vanguard High Dividend Yield (NYSEARCA:VYM) to Guggeheim Multi-Asset Income ETF (NYSEARCA:CVY). The 3.5%-5.5% annualized income should help to offset the persistent fears of a cataclysmic end to the investment universe. Either way, appropriate ETF hedges and intelligent stop-limit loss orders should help one rest easier about “being in.”

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.

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