Are Financial ETFs Signaling the Start of a Pullback?

Includes: ICF, IEV, SPY, VWO, XLF, XLK
by: Gary Gordon

The mainstream media detail the “undesirables.” Wholesale inventories dropped for the 10th straight month. CIT (NYSE:CIT) may still seek bankruptcy protection. And the Congressional Oversight Panel (a.k.a. COP) reinforced the reality that banks still hold plenty of toxic assets on their books.

So is this why the markets are down? How about the world markets… why might they have struggled? Is it because the vast majority of emerging markets are so far into overbought territory that they are more than 2 standard deviations above 200-day moving averages? Is it because China slowed down on some of its lending practices?

You can pick your reason, but if you ask me, it has far more to do with the end of a season. Specifically, the ease with which companies surpassed lowered earnings expectations helped propel markets higher. And now that season is complete.

Yet there’s one more factor that largely extended the unimpeded enthusiasm. Had it not been for the SEC’s decision to end the practice of “naked” short selling on July 27, we may not have seen another 2 weeks of gains that were led by financials and REITs!

Think about it. What sectors were stronger than these groups in the 2 trading weeks of 7/27-8/07? This is largely due to the fact that the most popular segments to short have been (and still may be) financial companies. It follows that curtailing what the SEC calls “abusive” is believed to help financial companies the most.

Select Stock ETFs Since THE SEC Rule Prohibiting “Naked Short Selling” (7/27-8/07)
% Gain 7/27-8/07 (2 Trading Weeks)
iShares Cohens and Steers Realty Majors (BATS:ICF) 22.4%
SPDR Select Sector Financials (NYSEARCA:XLF) 15.5%
iShares S&P Europe 350 (NYSEARCA:IEV) 3.8%
Vanguard Emerging Markets (NYSEARCA:VWO) 3.3%
S&P 500 SPDR Trust (NYSEARCA:SPY) 2.6%
SPDR Select Sector Technology (NYSEARCA:XLK) 0.7%

Like quite a few commentators, bloggers, money managers, advisers and planners, I believe a pullback is an inevitability. And now’s as good as time as any.

That said, if we use the pullbacks to select high probability success areas like resource-rich providers around the world, we are likely to be rewarded in Q4 of 2009. And while developed countries like the U.S. and in Europe may be slow-growing at best, investors will be dip buying here as well.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.