5 ETFs to buy this week

Expect the market to pause as the quarter ends.

By Jamie Dlugosch Mar 28, 2011 9:36AM

The market had a very nice recovery rally last week. The S&P 500 recouped losses from the prior week with nearly a 3% gain for the week.

 

External disturbances abated, and investors looked to stocks for potential growth. The bet for sure is that the U.S. and global economies are on much better footing and likely to perform well over the next two years.

 

Noted investor Laszlo Birinyi was quoted last week as saying the bull run is only half complete. That is logical, considering the average bull market lasts four years and we are only two years from the bottom of the market.

 

I’m a bit more cautious in the short term. As such, the ETF pick to click this week is the ProShares Credit Suisse 130/30 (CSM). The ETF provides exposure to stocks but with its short position provides protection in the event of a short-term correction.

 

In the long term, I would agree with Birinyi’s assessment that said stocks have already doubled from the lows without really taking much of a break. My view currently is that stocks are a bit in front of the recovery and due for a pause.

The rally last week was impressive, but I doubt it's sustainable. A nearly 3% move is quite a feat, especially given the headwinds. For starters, Japan is a major problem and we are seeing companies like Ford idle plants, worried about a supply disruption.

 

The big concern for me is valuation. Many stocks trade for high valuations that may or may not be supported by earnings. I know enough not to bet against the economy, but when this quarter ends this week, companies will have to report really strong results to keep the party going.

 

My expectation is that numbers will be good but not good enough. April could be a tough month as traders position portfolios for the proverbial sell in May and go away. I would be much more comfortable being aggressive with stocks if prices were a bit lower or earnings were stronger.

 

Here are my five ETFs to buy this week:

 

ProShares Credit Suisse 130/30 (CSM) – The CSM got back on track last week with a 2.6% gain. The fund performed well despite its short exposure. I’d stick with this ETF until stocks become a little bit more affordable. In the interim, investors shouldn’t get hurt as much by owning this fund during a correction.

 

ProShares Short Russell 2000 (RWM) – The big loser for last week was the RWM. Small cap stocks rallied impressively last week and as a result the RWM lost value. The ETF was down nearly 4% for the week. That is a steep price to pay for the insurance that this fund brings, but likely an over-reaction to recent selling. Look for more muted action in this fund if stocks move higher thus lowering the cost of your portfolio insurance. If stock lose value this will be a chip worth cashing.

 

SPDR Dow Jones Industrial Average (DIA) – Dow stocks were impressive last week helping to offset the losses in the RWM. The near 3% gain helped offset the near 4% loss in the RWM. If the market slows down next week the differential in performance will be a little less. My expectation is for the strongest earnings performance to come from the large cap space thus benefiting the DIA.

 

PowerShares Dividend Achievers (PFM) – Another big win was the PFM. The dividend ETF sank the week prior so a recovery was certainly in the cards. The PFM gained nearly 3% last week tracking very closely to the rest of the market. I’m not really looking for big gains here. Frankly, the swings over the last two weeks are a bit disconcerting. What I want with the PFM is stability. Hopefully that is what comes this week. If not, it may be time to reconsider this ETF for inclusion in our weekly portfolio.

 

ProShares Short S&P 500 (SH) – Stocks may go up and they may go down this week. Topping off our portfolio is some short exposure. The SH is not wild and crazy shorting with excess leverage. It is a smooth and easy fund that tracks perfectly the opposite of what happens with the S&P 500. It is the perfect ETF for a sideways moving market. There is nothing too crazy here as we protect our nice gains for 2011.

 

So far in 2011 our five weekly ETF picks have generated a return of 5.3%. That compares nicely to the 4.5% gain in the S&P 500. Beating the market with an absolute return strategy is icing on the cake. The goal here is to not lose money and we are doing that smartly.

 

Take an equal weight in each of these positions for the next week to hold those gains.

 

Top Stocks for 2011.

Tags: etf
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