ETFs Under Fire: What We Can Learn from Week of Selling Pressure

Just one week ago, I wrote about the apparent lack of interest in defensive segments of the economy like health care and utilities. It seemed that investors had been pleasantly surprised by earnings in tech, energy and materials. What's more, many seemed to be willing to "bargain hunt" in financials and the consumer discretionary arena.

Fast forward one week... profit takers wiped out the gains made in May. What's more, the only segments to fare well leading up to Memorial Day Weekend have been health care and utilities.

At the time of this post on 5/23/08, the iShares Dow Jones Health Care Fund (IHF) was up 2.3%. The Select Utilities SPDR (XLU) was up .55%. In contrast, the broader market and the other 7 major sectors have lost significant ground.

The hottest sub-sectors haven't been spared either. Profit takers have eviscerated Metals and Mining (XME), Transports (IYT), and Oil & Gas Equipment/Services (XES).

Until recently, the tide was shifting towards cautious optimism. Then oil's unstoppable run began to provoke and poke. Inflation data came in a bit worse than anticipated. Last, but not least, record-destroying news on the housing front rocked the boat some more.

So what can investor do? First and foremost, investors should protect their positions with stop-losses. I gave a great example of how to do this in my "Dow 13000 feature."

At the same time, one needs to recognize that pullbacks are part of the process. Specifically, the market had essentially catapulted 12% in 8 weeks... unabated. From the third week of March (think Bear Stearns bailout) through Monday, May 19, optimism returned.

Yet, in an environment that I described with the "s" word (stagflation), one cannot assume a free ride to record heights. In the absence of good news, then, sellers always return.

Nevertheless, if you felt that you missed the opportunity to participate in the market's rebound, you now have the chance to acquire ETFs at a 4%-5% discount since Monday. For international exposure, the Claymore BRIC Fund (EEB) still presents powerful fundamentals and technicals. I also like the WisdomTree Emerging Market Dividend Fund (DEM) and the iShares International Dividend Fund (DWX) for reasons that I discussed in a recent column.

Here in the U.S., the economy may take a while to recover. It may require a bottom in housing. Nevertheless, you can prepare yourself by reviewing my "Hit List." These are the best sector ETFs for the economic recovery.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.