3 ETFs for a near-term pullback

Now is not the time to buy stocks. Consider these instead.

By MSN Money Partner Jan 22, 2013 10:53AM
Stock index Image Source Getty ImagesBy Teeka Tiwari, etfwarrior.com

You know, I understand that the market is going higher and, who knows, maybe there is another 15-50 points of upside in the S&P 500. But I've got to tell you, it's just not a good time to buy stocks -- right here and right now.

This market is incredibly overbought and that simply means that the market has moved up too far, too quickly. And we all know that the stock market is like a pendulum. It cannot stay elevated for long without swinging back down.

I still think the overall uptrend is intact so that "backswing" is actually a good thing because it enables the market to wash out the weak hands so it can swing back up to higher highs.

The tricky part here is that an overbought market can get even more overbought. So just because a market is overbought doesn't mean that you should start selling short or dumping all of your positions.

Generally, when the market gets overbought I'll make my stop loss levels a little narrower and only commit to new buys on a pullback. So the question today is what three ETFs look the best to buy if we get a near term pullback?

iShares Dow Jones US Financial Sector (IYF)  
When buying in on a pullback and the market is in an uptrend, you want to focus your buys on those sectors or market indexes that have lead the market up.

Generally, these are the groups that go down the least on a pullback and up the most on the subsequent rally. The finance sector is a perfect candidate for this approach.

IYF is a great-diversified way to play the entire financial sector. Use a pull back to $60 to get long with a $56 stop with a $70 price target.
IYF chartiShares Nasdaq Biotechnology (IBB)
Biotech has been on a tear over the last 12 months and IBB is a very liquid ETF that gives you exposure to great names in the space. Look for a pullback to $130 before being a buyer. You can use a $124 stop with a price target of $155.
IBB chartSPDR S&P MidCap 400 (MDY)
The midcap stocks have been the leading sector of this entire bull-run. I expect that to continue and would use a pullback to $183 to get long. You can use a tight stop at $180, with a price target of $215.
MDY chart


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