Short the market with these 6 ETFs

Buy and trade, or in this case sell and trade, can be the right methodology these days.

By Forbes Digital Apr 22, 2013 12:17PM

Portfolio Account statement © Alamy Creativity AlamyBy Richard Henry Suttmeier, Forbes Contributor

My investment theme continues to be that investors should be raising cash on stock market strength until they have a 50% maximum allocation to stocks.

This particularly applies to investors who doubled their money because they bought stocks when they were cheap four years ago.

I gave similar advice during the tech bubble of 2000 when the Nasdaq ($COMPX) was above 5,000 in March 2000. My call then was to reduce exposures to Nasdaq stocks by at least 50%. I made a similar call in October 2007, saying that gains above 14K on the Dow ($INDU) would not be sustained and that the next 2000 points were down, not up.

On the opposite side of the ledger, I was bullish on stocks between July 2002 and October 2002 and even in March 2003 as our troops headed to Baghdad. I made an extremely bullish call in March 2009.

My concept is to gradually sell positions when stocks become overvalued fundamentally and overbought technically, which they have been since mid-March. Then to gradually buy back stocks when they become undervalued fundamentally and oversold technically as they were four years ago.

With this investment methodology you are employing a buy-and-trade strategy instead of the more risky buy-and-hold strategy. Keep in mind, with this strategy, you are not selling at the exact highs, nor are you buying at the exact lows. Instead you are capturing a portion of the volatility between lows and highs, raising cash near highs, deploying the cash again near lows.

Traders who are trying to short the market should be dabbling among the exchange-traded funds I have been tracking in recent weeks. An allocation to the short side should begin small, but you flip the strategy to sell-and-trade from buy-and-trade when a market top has been confirmed. A confirmation of a top would be a weekly close below my semiannual value level at 14,323 on the Dow Jones Industrial Average.

Three months ago, fourth quarter earnings season had more hits than misses and so far first quarter earnings have been more misses than hits. Earnings per share misses, weaker than expected revenue, and blaming weaker than expected results on factors such as the recession in Europe has been the norm.

Last week we learned that National Association of Home Builders housing market index fell two points to 42 in April despite a rise in housing starts in March that exceeded an annual rate of one million units. We also had reports of weaker than expected manufacturing from the New York Fed Empire State manufacturing survey and from the Philadelphia Fed manufacturing index.

This was offset by a Beige Book that was a bit more optimistic. On Thursday, jobless claims came in above expectations as the four-week moving average rose to 361,250, which keeps this measure above the 350,000 recessionary threshold.

Stocks are not as overvalued as they have been as lower prices and a lower 30-year bond yield make stocks more undervalued or less overvalued. At we show that 52.3% are overvalued, down from the Valuation Watch 61.1% level of two weeks ago. We show that 13 of 16 sectors are overvalued; four sectors by double-digit percentages. Basic materials are 15.3% undervalued on the back of lower commodity prices. The most overvalued sectors are transportation by 10.6%, finance by 11.9%, retail-wholesale by 13.2% and consumer staples by 13.6%.

My measure of momentum is the 12x3x3 weekly slow stochastic, and these readings are now showing some negative divergences with readings of: 93.20 on Dow Industrials down from 96.14 last week, 89.70 on S&P 500 down from 93.43 last week and 84.39 on Nasdaq down from 89.07 last week. Remember that readings above 80.00 are overbought on a scale of 00.00 t0 100.00.

Here are this week's trading parameters for key ETFs:

SPDR S&P 500 ETF Trust (SPY) ($155.48)

My quarterly value level is $144.56 with semiannual and monthly pivots at $156.59 and $156.89 and weekly risky level at $159.35 versus the all time high at $159.71 set on April 11.

Industrial Select Sector SPDR Fund (XLI) ($40.38)

My quarterly and annual value levels are $35.95 and $35.87 with monthly and semiannual risky levels at $41.74 and $42.03 with the multi-year high is $42.13 set on April 11.

Consumer Discretionary Sector SPDR Fund (XLY) ($53.24)

My quarterly value level is $50.55 with semiannual and monthly pivots at $53.38 and $54.34 and a weekly risky level at $55.43 and the multi-year high at $54.41 set on April 12.

iShares Consumer Services Sector Index Fund (IYC) ($98.31)

My quarterly value level is $93.63 with semiannual and monthly pivots at $95.48 and $98.64 with this week's risky level at $101.89. This ETF set an all time high at $100.24 on April 12.

Financial Select Sector SPDR Fund (XLF) ($18.08)

My semiannual value level is $16.79 with weekly and monthly risky levels at $18.56 and $18.71. XLF set a multi-year high at $18.65 on April 11.

Technology Select Sector SPDR Fund (XLK) ($29.35)

My annual value level is $27.22 with weekly, monthly and quarterly risky levels at $30.18, $30.24 and $30.35, and semiannual risky level at $34.44. XLK set its 2013 high at $30.63 on April 10.

More on Forbes

Apr 22, 2013 3:53PM
Don't fight the FED fools. Any corrections, 5-8%, will be OK for long term investors to buy more good values. FED won't back off of bond purchases until early 2014 after Ben's retirement.  Rates won't go up until end of 2014 or early 2015 if inflation stays lower then 2.5% and UE stays above 7%.
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