Top 5 ETF buys for this week

Large stocks left other sectors in the dust last week. Look for the reverse next week.

By Jamie Dlugosch Jan 9, 2011 6:47PM

The market is off and running in 2011. Traders came back to a market that had enjoyed its best December in two decades uncertain whether to sell stocks short or push the market higher.


Aside from the largest names in the market stocks struggled during the first week of trading. Momentum names gave back gains and the inflation trade took a breather on the strength of the dollar gaining during the first week of the New Year.


The S&P 500 managed to gain 1%, but other indexes were negative.


Look for a reversal in week two. Momentum names and inflation plays will be where the action is next week.


My recommendation would be to jump all over the IShares Russell 2000 (IWM) ETF this week.


Small caps were slightly lower last week delaying the start of a small cap rally known as the January effect. The trepidation is directly correlated to the gains in December.


Investors are concerned that the market is due for a pull back. Worried that markets do not move up in a straight line the majority of traders were tentative last week.


That will not be the case next week. A full docket of earnings reports begin to roll in. I expect the strong numbers from corporate America to be more than enough to remove the conservative trading that started the New Year.


Conditions remain positive for stocks to gain value. Momentum names combined with inflationary bets will be the big winners in such an environment. It takes nerves of steel to commit capital in a rising market.


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Investor would be wise to summon the necessary courage or risk missing out on bull market gains. My strategy for week two will be the same as it was for week one.


Here are the five ETF’s to own this week.


IShares Russell 2000 (IWM) – Investors took a wait and see on small cap stocks during the first week of trade. With the larger stock indexes gaining more than 1% last week, the small cap group has some ground to make up. If the January effect holds true, this ETF will provide big gains for investors. The catalyst will be earnings.


SPDR KBW Regional Banking (KRE) – So much for those December gains. Bank stocks retreated in the first week of the New Year. The KRE lost some 4%. I smell a rat here. Wall Street is notorious for manipulate share price on behalf of customers. Could that be happening in the banking space in advance of possible acquisitions? I wouldn’t be surprised. Look for a correction to the upside in the space next week. All it takes is one deal to be announced and the KRE will recover lost ground and then some.


ProShares Ultra Oil & Gas (DIG) – Oil prices sold off on what some claimed to be technical reasons. Oil prices had come a long way in a short period of time. A pause would be expected. That said, the long term conditions of economic expansion and scarce supply bode well for higher oil prices. I would ignore the technical here and look for oil to reverse higher next week.


SPDR S&P Homebuilders (XHB) – Homebuilders rose smartly during the first week of trading in 2011. I expect more of the same in the coming week. On Friday we say industry leader KB Home (KBH) announce earnings results that beat expectations. That stock was up more than 6% on Friday. Momentum investors may find this group attractive in 2011. I would keep this position for the next week or more.


SPDR S&P 500 (SPY) – It was smart to have exposure to larger stocks for the start of the year. Interestingly the ETF did not do as well as the index, but that was more a function of big future gains on Monday morning before the market opened. The S&P 500 itself opened essentially flat whereas the ETF opened significantly higher. As stocks settled lower after the open the ETF was showing a loss as opposed to gains for the actual index. This little technicality is nothing to worry about and I would keep the long position in the ETF to mute the other more aggressive positions.


That minor technical glitch caused the entire portfolio of ETF’s to lag the market last week. I would throw the results out the window and look for big gains next week. Keep an equal weight in all of the above positions.


My Top Stocks for 2010 gained nearly 30% last year. How will I do this year? Get my Top 10 Stocks for 2011 here absolutely free.

Tags: etfoil


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