This week’s ETF trader

Keep a neutral to slightly negative bias as we march toward 2011.

By Jamie Dlugosch Dec 19, 2010 6:17PM

Right idea, horrible execution as the market began its annual winding down of the year with slower volume and disinterested trade.

 

The market closed up fractionally. Within that construct my ETF picks ended up dropping ¾ of a percent. What happened?

 

Sometimes no matter how right your predictions Mr. Market can manage to punish even if you are trying to be conservative as I was last week. The loss can be solely attributed to big losses in China last week.

 

That won’t happen again. We’ll jettison that pick in favor of the SPDR Regional Bank ETF (KRE) as I keep a market neutral portfolio heading toward the end of the year.

 

I have big expectations for regional banks in 2011 as the sector is ripe for consolidation.  Canadian bank, BMO’s recent purchase of M&I Bank is likely to be just the beginning of that consolidation.

 

As for China, stocks there are becoming ridiculously cheap. Traders though are betting on a slowdown brought by the central governments effort to fight inflation there and selling stocks irrespective of price. Add in high volatility and that selling conspired against an absolute return approach last week.

 

No worries though as this was the first misstep in 3 months of ETF trades that have delivered more than 100 basis points of out performance with less risk for investors. We’ll just keep chugging along.

 

Nearing the end of 2010, I will keep my bias of a sideways to negative market. We are long overdue for a correction. You could tell by last week’s action that stocks were running out of steam with late day sell-offs and weakness at the close on most days.

 

It will be hard to find positive gains next week. Instead investors would be wise to protect gains. That’s what I’m doing here with this week’s ETF trades:

 

ProShares Short Russell 2000 (RWM) – Small cap stocks were dead even last week, but there is more to the story. When stocks were down, this group was down significantly more than the overall market. Given a slightly negative bias it makes sense to keep this position for next week. We should make money here next week and with the market running out of steam losses would seem to be unlikely.

 

SPDR KBW Regional Banking (KRE) – We’ll pivot away from the volatility of China with this week’s pick of KRE. Regional banking stocks are likely to be a favorite for investors in the coming year. The strength will be driven by an acceleration of merger and acquisition activity. If stocks drop as I expect next week, I expect the KRE to drop less than the overall market. That is an added benefit of the position for ETF traders.

 

ProShares Short Oil and Gas (DDG) – At some point the oil markets will take a step back. It has been a bull rush to the $100 per barrel mark. Long term, conditions are very favorable for oil, but consolidating recent gains is the short term play. ETF traders can get short exposure to the market with this position.

 

SPDR S&P Retail (XRT) – Retail sales are on fire and bigger than most are expecting. That trend continues as we wind down the holiday selling season. I know plenty of shoppers ready to do more after Christmas. It is all good in this sector and most stocks in the sector are likely to beat current expectations. The retail ETF is a good way to play the long side of the market within an absolute return approach.

 

ProShares Short S&P 500 (SH) – A one percent drop next week in the S&P 500 is not out of the questions. Gains for 2010 are now solidly above 10% for the year. That is not bad considering the negativity toward stocks throughout much of the year. Hedge funds looking to lock in gains for 2010 will provide ample selling pressure in a thinly traded market. Things will be slow next week. At a minimum we go sideways once again.

 

Keep an equal weight in these five positions. The result is likely to be gains in a market that takes a step back next week.

Tags: oil
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