Will a Bull Market Follow this Bear Market Rally?
By Ron DeLegge, Editor
March 19, 2009
SAN DIEGO (ETFguide.com) Ė Amidst the distraction surrounding the undeserved bonus compensation of Americaís greatest corporate failures has been a rather pleasant bear market rally. Unfortunately, people have been too busy trying to figure out who deserves to go to jail next and for what. Can we get back to investing?
Of course, the next question becomes how long will the rally in stocks last?
For its part, the Federal Reserve is doing everything in its weak hand to stabilize financial markets.
The latest announcement is a plan to buy $300 billion in long-term U.S. Treasury securities. The price of Treasury linked ETFs like the iShares Barclays 10-20 Year Treasury Bond Fund (NYSEArca: TLH) and the SPDR Barclays Capital Long Term Treasury ETF (NYSEArca: TLO) soared on the news.
Itís already been one month since bailout 2.0 was passed into law. On February 17th, President Obama signed the $787 billion stimulus bill and the Dow Jones Industrial Average (NYSEArca: DIA) closed the day at 7,552.60. As of this articleís date, we are just about back to even from where the Dow was on February 17th.
With the exception of Bailout 1.0, a $700 billion monstrosity which was mainly meant to help sinking financial institutions,
Bailout 2.0 is the most sweeping economic stimulus package in recent history. In any event, the stock marketís reaction to both bailouts has been strikingly similar. You might say itís been a ďcool reception.Ē
My colleague Simon Maierhofer pointed out the DJIA dropped 30% after the first bailout package was approved on October 2nd. On February 3rd, he wrote an article with titled, ď11 ETFs for the Dow 6,500 Portfolio.Ē The subsequent reaction to bailout 2.0 was a roughly 15% drop that took the DJIA to around 6,440.
Now more than ever, itís important to have a panoramic view of whatís happening in the financial markets. Beyond stocks, itís vital that you have a clear picture of what investment themes are working and which ones are not.
Hereís a quick snapshot of whatís hot and whatís cold.
Letís begin with 4 ETFs that have upward momentum.
iShares Silver Trust (NYSEArca: SLV)
Silver is the Rodney Dangerfield of precious metals. While gold gets all the respect itís silver thatís been outperforming. So far this year, SLV has jumped 14%* in value, which has outdone the 7.6% gain for gold (NYSEArca: GLD). Silver tends to be more volatile than gold and in 2008 SLV fell 27.24% whereas gold eked out a gain of around 4.5%.
iShares MSCI Brazil ETF (NYSEArca: EWZ)
Donít look now, but Brazilian stocks inside EWZ are collectively up 9.2%. Gross domestic product (GDP) growth in most emerging market countries is quickly decelerating and in many cases turning negative. Brazil is one three emerging market countries likely to still post modest GDP gains, despite a global recession in economic activity. In 2008, EWZ fell 55.8%.
Market Vectors Gold Miners (NYSEArca: GDX)
Do you invest in gold itself or in gold mining stocks? Depending on whom you ask, youíll get varying responses. Historically speaking, gold stocks have around one-and-a-half to two times the volatility of gold. While gold stocks are closely linked to the performance of gold and other metals, they sometimes diverge. In 2008, GDX fell 26.56% whereas gold gained 4.5%. So far in 2009, GDX is up 3.5%.
Vanguard Emerging Markets ETF (NYSEArca: VWO)
Although emerging markets stocks inside VWO are down 1.5% on the year, theyíve been big participants in the bear market rally. It should also be noted that as a group, emerging market stocks are outperforming developed international stocks (NYSEArca: EFA) along with domestic large cap stocks (NYSEArca: IWB).
Now, hereís a list of 3 ETFs with downward momentum.
Financial Select Sector SPDR (NYSEArca: XLF)
Donít be fooled by the recent upward trend in financial stocks. This is still a very diseased and sick industry sector. Itís important to note, the XLF doesnít just contain exposure to banking stocks, but it also has stocks of asset managers, brokers, specialty finance and insurance companies. So far in 2009, XLF has dropped 24.9% lest I remind you it cratered 55.21% in 2008.
Industrial Select Sector SPDR (NYSEArca: XLI)
Industrial stocks have not (yet) responded well to the governmentís multi-billion infrastructure plan. The spending spree hasnít started yet, so itís too early to report what sort of impact, if any, this will have on earnings. Of the 9 S&P industry sectors, only financial stocks are worse performers than industrials. So far in 2009, XLI has dropped 21.9% and last year it declined by 38.88%.
Vanguard REIT ETF (NYSEArca: VNQ)
After several years of outperforming the broader stock market, real estate stocks hit a wall. The steep drop that began in U.S. residential real estate is now spreading to commercial real estate. This decline is depressing asset values and many large REITs are losing tenants. So far in 2009, VNQ has declined by 26.4%.
If the stock marketís reaction to the first bailout fully imitates the 30% decline in Dow stocks after the first bailout was passed, that would put the Dow Jones Industrial Average in the neighborhood of 5,287. This is not a prediction, but an observation. Stocks have already compromised their November 2008 low of 7,552.29 and are in the midst of a counter trend rally.
In each edition of our ETF Profit Strategy newsletter we assemble a comprehensive ETF hot list and cold list. The point is to give ETF investors perspective on what investment themes are working and which ones arenít working.
If youíre going to make money in this veracious bear market, itís important to position your financial assets accordingly. What weíve given here is just a snapshot. If youíd like to see the full portrait, check out our newsletter. In summary, donít be fooled by the media headlines. People that are using the right financial products with the right investment strategies usually get the right results Ė in any kind of market.
*Performance figures quoted are YTD thru 3/19/09 market close