5 top ETF buys this week

Investors can expect stocks to continue their climb for the rest of the year.

By InvestorPlace Sep 27, 2010 10:37AM

Gold © Comstock Images/JupiterimagesBy Jamie Dlugosch


The market is having an Indian summer in September, and stocks are the place to be. At today's open, the S&P was up 8.5% in September, and the Nasdaq was up 12.6% so far for the month.

 

I suppose it was all very predictable. I wrote about Tony Robbins and his "get out of the market" YouTube video that had gone viral. Was there ever any better buy signal for stocks?


As if on cue, the rally began shortly after, and aside from one or two short pauses, it has been on a tear.

 

It has to end at some point, right? Perhaps, but with stocks considerably cheap relative to bonds, investors can expect stocks to continue their ascent for the remainder of the year.

 

The volatility in the market has made this environment ideal for traders, and what better way to trade the market than with exchange-traded funds, or ETFs.

 

Beginning with this column, each Monday for the rest of the year, we will publish our favorite ETFs. We will use a hypothetical $100,000 starting account and keep score along the way.

In determining the picks, I will use a combination of fundamental and technical analysis, mixing long- and short-term outlooks for stocks, the economy and specific industries.

 

Helping to guide the picks will be an examination of economic data to be released in the week ahead.  For example, this week, we will get reads on consumer confidence, the Chicago PMI and construction spending. Will any of these stats be enough to kill the current rally?

 

In determining this week's ETF selections, I start from a premise that stocks are a bit heated. Nothing goes up forever, and even though the market broke through important technical levels, the likelihood of a correction at some point is likely.

 

The only question is timing.

 

I know in my own stock model portfolio I have a market-neutral position that I find difficult to change, given the sudden run-up in stocks.

 

Starting a new allocation with ETF picks today faces a similar challenge. Do we go all in on a rally that may be starting to run out of steam?

 

Let's start with some assumptions.

 

Consumer confidence is a lagging indicator. We have heard many people complain that the recession may be over but consumers are still feeling the pain.  My take, then, would be to suggest that consumer confidence will be below expectations.

 

Pricing statistics are likely to show minimal moves higher. There is no inflation anywhere on the horizon, nor is there deflation. That bodes well for current fiscal policy and should be supportive of stocks.

 

Ultimately it really is a mixed bag for this week.

 

As such, here is how I would play it, and here are the five ETFs to buy in equal amounts for the trading week:

 

SPDR Gold Shares (GLD) Investors cannot lose on gold. No matter how things shake out from here, a devaluation of the dollar is likely. If so, commodity prices will push higher. Gold hit record highs last week and I expect that trend to continue this week.

 

ProShares Short Russell 2000 (RWM) If stocks correct this week look for smaller stocks to feel the most pain. The risk here is if the rally continues as the flip side of that coin is also true: when stocks go up smaller companies tend to rise faster. Frankly I do not think the risk is all that high in the coming days. This is not to say that stocks can’t go higher. Only that stocks in the next few days are likely to take a breather.

 

WisdomTree Large Cap Dividend (DLN) To the extent stocks tread water, again a very likely possibility this week, owning a dividend ETF makes sense. The Wisdom Tree version of this strategy is one of the highest paying dividend ETF’s according to Morningstar.

 

SPDR S&P Metals and Mining (XME) Another play on the collapse of the dollar is to go with an ETF that buys companies in the mining sector. Despite the moves in gold prices, many mining company stocks have not moved in direct correlation. I’m betting there is a lag in that move. The longer gold stays in record territory the more likely mining stocks will catch up.

 

SPDR Dow Jones Industrial Average (DIA) The Dow Jones Industrial Average can’t get any love these days. Investors tend to view the index as a list of companies that may be dinosaurs devoid of growth. Well, maybe not that bad, but there is a certain aversion to the index. Expecting a correction this week, I want to own the index that is likely to hold up the best. That would be the Dow.

 

I’ll deploy my mythical $100,000 equally across the above five ETF’s. I’ll keep track of how we do and report back next Monday with new recommendations.


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