5 ETFs to buy this week

Will the Santa Claus rally continue?

By Jamie Dlugosch Dec 27, 2010 6:14PM

Santa Claus © Digital Vision / Getty Images Santa was very good for investors this year. A very impressive rally that began after Labor Day plowed forward again last week for a solid gain of .9%. That puts gains for 2010 solidly in double digits.

 

Not bad considering the amount of pessimism surrounding the markets for much of the year. I guess that’s why contrarians have done so well.

 

I’ll continue to play it safe with my ETF trades this week. My favorite pick is the contrarian play against the so-called January effect that can propel small stocks higher.  

 

Investors can bet against the January effect with the ProShares Short Russell 2000 (RWM), but keep in mind with current sentiment, small cap stocks are likely to do very well when January arrives.

 

Buy when others sell and sell when others buy. Except that has not been the case over the last couple of weeks. Everyone seems to be in on the action not wanting to miss the gains.

 

I’m noting the change in sentiment. It really could be the start of an impressive rally for 2011. Then again the lack of volume could suggest that nothing of late is to take too seriously.

 

I will admit the current market environment is the sort that causes me great difficulty. As a lover of bargains it is always hard to rump on board after the ship has left the harbor. Valuations may not be compelling in a traditional sort of way, but compared to bonds stocks are dirt cheap.

 

They are also cheap in the sense that of the business cycle. Of course there is that all important market sentiment. You cannot go against the tide when it really gets rolling. Post continues after video:

One interesting nugget from last week was the trading in Nike (NKE). The company released earnings but indicated that higher labor and commodity expenses would negatively impact future earnings.

 

The stock sold off by more than 6% on the news. Could that be foreshadowing things to come?

 

These are all things to think about heading toward the New Year. For now, I’ll sit on the sidelines with a conservative trade for another holiday shortened trading week. Here are the five ETF’s I would own this week:

 

ProShares Short Russell 2000 (RWM) – Small cap stocks are off and running. If the January effect is to be believed more gains are to be had next month. I’m still waiting for the proverbial sell-off in small cap stocks. It may not come, but I want to be prepared just in case. If the market goes down next week this will be a great place to make money.

 

SPDR Regional Banking (KRE) – If bank executives are smart they will execute merger transactions at the start of the year before prices in the market go up too far. It is somewhat a game of chicken. Investors of banking stocks today will be the winners. Last week the KRE moved up nearly 5%. This ETF could be the single best place to put your money over the next month.

 

ProShares Short Oil and Gas (DDG) – Oil is tantalizingly close to $100. Before breaking such an important barrier some consolidation would be expected. For those keeping a close eye on the economy and inflation a sell-off in oil would be welcome news. Long term such a sell-off is unlikely. The economy is humming if anecdotal evidence of the holidays is to be believed. My prediction is that oil makes a run at $150 next year. For now I’m betting on consolidation with this short oil and gas ETF.

 

SPDR S&P Retail (XRT) – Cash registers at stores across the country are ringing loudly. It was a fantastic year for anyone selling anything. On-line sales were up double digits. The entire retail space is on fire. This is a wave to ride on the long side. Look for positive news next week to carry the XRT higher.

 

ProShares Short S&P 500 (SH) – I’ll stay conservative with a position in the short S&P ETF. The market is long overdue for some sort of correction and I’m tired of sounding like a broken record. This position is for protection only for those investors like me interested in sitting on the sideline at a time when predicting market direction is a foolish game. Look for the pros to return after the New Year and this trade to expire.

 

Last week we managed to track the market nicely while sleeping easy. This week brings more of the same. Keep an equal weight in these five positions.

Tags: etfoil
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