5 ETFs to own this week

Watch out for the next leg lower

By Jamie Dlugosch Aug 22, 2011 10:25AM

Enough is enough. The plunge in stocks returned last week with the S&P 500 dropped more than 4%. Bond yields sank and gold skyrocketed.

 

Something is truly amiss and I’m not talking about the standard bear fare of debt defaults or runs on banks in Europe. I’m talking about earnings.

 

The market sell-off that began in July is fast becoming a self-fulfilling prophecy. Consumers are rightly frightened with growth slowing, stocks losing value, home prices still crumbling and policy makers with little ammunition to change things.

 

The next step is for earnings to drop. At the moment Wall Street estimates are too high if indeed we slip into recession. The market is pricing in a recession, but the numbers many investors use to discount future cash flows has not.

 

In a market like this the cream will rise to the top. Other stocks are likely to fall as earnings performance falls short.

 

It may be late in coming, but I’m moving to a more conservative position with my ETF’s to buy this week by switching to the ProShares Short Russell 2000 (RWM).

 

Prior to all of this a slow growth environment was baked in the cake. That fragile outlook will be easily shattered by the collapse in stocks. The psychology is too much to overcome. I truly believe we could have made out of this mess had stocks not collapsed.

 

Now stocks collapse, spending slows and profits fall. In some ways it is a chicken and egg question. In my opinion the stock collapse will be the main culprit when we look back and ask what went wrong.

Now we simply sit back and navigate as best we can. I do not expect any big rally in stocks from here. Instead, watch corporate earnings reports. We are already seeing signs of weakness. Those companies missing estimates here are getting crushed in the market.

 

Wall Street will likely be too slow in reducing estimates. That means we could be seeing more and more companies missing results when earnings are reported. This is the kind of analysis I can believe in and it is not a pretty picture.

 

That said it is what it is. I’m beginning the process of moving to a more neutral position with these 5 ETFs to own this week. They are as follows:

 

ProShares Short Russell 2000 (RWM) – Small cap stocks lost 6.5% last week. One of the stocks I follow was down 30% in one day after reporting earnings results that missed expectations. With many Russell 2000 stocks way above 2008 recession lows, there is more room to fall here. I’ll switch to the short RWM to capture gains during a recession part II.

 

iShares S&P North America Technology and Multimedia Fund (IGN) – Technology stocks were also down big last week. The IGN shed 5.7%. With HPQ down 20% in one day last week, technology was primed to fail. I’ll keep this long position as I move to neutral with my picks here.

 

SPDR Dow Jones Industrial Average (DIA) – Dow stocks, especially those with big dividends are likely to be the best performers on a relative basis during a bear market. Last week the Dow was down only 4.4%. The losses hurt, but the losses are smaller. Keep the DIA this week.

 

SPDR Gold Shares (GLD) – Gold is heading to $2,500 during a double dip recession. I’ll admit I don’t understand the attraction, but I do understand momentum and fear. Gold is doing well on both of those counts. I don’t see a correction in gold being a significant risk. I’ll try to capture the blow off rally through $2,000 with my pick here.

 

SPDR S&P 500 (SPY) – I’m looking for balance in going to a more neutral stance with the market. Keep the wide exposure of large cap stocks with the SPY. It is likely we will lose less here if stocks continue to fall.

 

Keep an equal weight in the five ETF’s above.

 

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