Volume Breadth Favors Non-Cyclical 'Defensive' Sector ETFs

by: Gary Gordon

Two of the most bullish voices in the mainstream media include money manager Ken Fisher and Bob Doll, the chief equity strategist at Blackrock. Fisher experienced an epic “fail” by completely missing the 2007-2009 bear/financial collapse; he had little choice but to stick with a never-ending bullish theme to claim credit for calling the “turnaround.”

Bob Doll has always been more measured; his accomplishments have less to do with Fisher-like marketing skill and more to do with nose-to-the-stone analysis. Nevertheless, if you follow Doll’s weekly investment commentary, it’s a similar “rub” to the one that you got when you listened to Goldman Sachs’s perma-bull, Abby J. Cohen.

Why am I bringing up these prominent men of a certain age? Both Fisher and Doll have gone on record as expecting corrective activity for stocks. They remain long-term bullish, but are decidedly less enthusiastic about the immediate term.

Since both speakers are prone to “calling it wrong,” does it really matter that the uber-bulls are getting nervous? In the present set of circumstances… yes. The reason? A monumental shift toward non-cyclical, defensive ETFs.

Volume Breadth

More money is pouring into SPDR Select Consumer Staples (NYSEARCA:XLP) and SPDR Select Health Care (NYSEARCA:XLV) than into economically cyclical sector ETFs. Specifically, over the last 20 trading days, advancing defensive stock volume has been far greater than declining defensive stock volume. In contrast, advancing cyclical stock volume has been far less than declining stock volume.

We can see this unfavorable near-term trend expressed as a percentage above or below a 20-Day simple moving average. And while the S&P 500 itself may have broken out above the 1350 level, investors seem to be headed for perceived safer equity grounds.

AD Volume Net %
20-Day SMA
Defensive ETFs
SPDR Select Consumer Staples (XLP) 21.3%
iShares Pharmaceuticals (NYSEARCA:IHE) 20.2%
iShares DJ Utilities (NYSEARCA:IDU) 18.2%
SPDR Select Utilities (NYSEARCA:XLU) 17.4%
iShares DJ Healthcare (NYSEARCA:IYH) 14.6%
Cyclical ETFs
SPDR Select Energy (NYSEARCA:XLE) 7.2%
SPDR Select Materials (NYSEARCA:XLB) 2.8%
iShares DJ Transports (BATS:IYT) -4.7%
SPDR Select Financials (NYSEARCA:XLF) -14.8%
iShares Networking (NYSEARCA:IGN) -16.3%

I’m not calling for a faith-shattering pullback in stock assets. Fund flow should continue to keep the broad-based indexes from seeing a full-fledged bear in 2011.

Nevertheless, volume breadth is weakest in the “we-believe-in-our-economy” sectors. When you add this reality to a number of other economic concerns (e.g., (a) falling copper and timber prices, (b) GDP disappointment, (c) debt ceiling debate, (d) Eurozone crisis reignited, (e) Japan and U.S. debt ratings, (f) end of QE2 in June, (g) gas at the pump, etc.), you might benefit from ETFs that represent foreign stocks.

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.