A Contrarian Take On Shorting Financial ETFs

I have received a number of e-mails in the past week with respect to "shorting" the financial sector. Some argue against my thesis that the banking system will thrive on Fed intervention and rate cuts. Others are just curious if there's another wave down for financials, similar to the homebuilders.

Obviously, I cannot predict the markets. Yet, whenever e-mails regarding "shorting the financial sector" or exiting the market begin pouring in, the contrarian inside me gets jazzed!

There's no doubt that the lending debacle is still playing itself out. And there's little argument about problems around the world with regard to leveraged debt ownership.

However, when people shout from the rooftops that the sky is falling, and they do it as the markets are dropping 300+ points in that day, I have only one regret: I wish I had more cash to buy!

Market psychology is really quite basic... when you think about it. When people begin to feel comfortable with the way that their portfolios are performing, they might wish to consider "selling high and taking some profits." In contrast, when fear begins to sound panicky... when too many people want to profit from down moves in the market... smart contrarians are "buying low."

The banks have been beaten up pretty badly. And this has occurred in a year when the markets have, all things considered, performed rather admirably. A contrarian, even a sector rotation enthusiast, would want to take note of the development.

Indeed, the banks have pretty much soiled themselves. Yet, they are extremely undervalued on a historical basis. AND, the banks are the ones that benefit from the woes of consolidating/bankrupt lenders. As bad as the KRW Bank Index (KBE) looks to the momentum investor, the contrarian investor sees value.

There are other areas of the marketplace where a contrarian investor would likely poke his/her nose. For example, technology has taken the leadership role that it typically takes in Q4. And broader tech is up nearly 15% over 6 months.

In contrast, semiconductors continue to lag behind in a fashion that is not typical of the cyclical sub-sector. Why have the semis underperformed? The topic would be fodder for another article!

That said, the contrarian thinker might recognize that short interest in the semis is overdone; the pessimism over Intel and Advanced Micro has peaked. And it may indeed be time for the iShares Goldman Semiconductor Fund (IGW) to shine. (Hey, how do you think all of those iPhones and video gameboxes work anyway!)