A farmer relies heavily on well established seasonal patterns when it comes to sowing and harvesting. Unexpected natural disasters such as flooding, drought or pests can have a catastrophic effect on the farmer’s crops and financial well being.

Time tested seasonal patterns and correlations between industry sectors and economic cycles used to be the profit engine behind sector investing, however, just a global warming has shifted seasonal patterns, this bear market has obliterated age old patterns of sector seasonalities and Wall Street proverbs.

Not all bear markets are created equal. The 2000, tech-bubble induced bear market saw the Technology Select Sector SPDRs (NYSEArca: XLK) and tech-heavy Nasdaq (Nasdaq: QQQQ) tank over 40% while the Financial Select Sector SPDRs (NYSEArca: XLF) and Consumer Staples Select Sector SPDRs (NYSEArca: XLP) gained over 25%.

Four out of the nine S&P 500 industry sectors actually boomed in 2000 while five sectors busted.  The result was a net loss of only 9.15% for the broad S&P 500 (NYSEArca: SPY). Even as equity prices were correcting, the real estate market and iShares DJ US Real Estate ETF (NYSEArca: IYR) began their six-year winning streak.

The 2008 bear market proved to be much different. There was no safe haven. The only difference between the various industry sectors was the extent of their respective losses. Who invests to lose?

You don’t step into your car with the objective of keeping accidents to a minimum. The goal is to reach your destination safely. Neither a fender bender nor major crash would be acceptable. Why should investing be any different?

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The best case scenario for sector investors over the past 18 months has been a “fender bender” while many ended up “crashing” their portfolio when really they should have kept their car in the garage (portfolio in cash).

Cleary, timing has become one of the most important ingredients to successful sector investors. Aside from counter trend rallies, this bear market did not and will not permit any fractional bull market to co-exist amidst the equity meltdown.

For this reason, every investor needs to know if the March 9th market bottom signaled the end of this bear market.

We will discuss the long-term implications of the March lows in a moment. Regarding the short-term outlook, ETFguide sent out the following Trend Change Alert to subscribers of the ETF Profit Strategy Newsletter on March 2nd, about a week before the market bottomed: “Ideally, we would like to see lower lows for all indexes brought about by a final phase of capitulation. One more up-down sequence over the next 1-2 weeks concluded by a huge down-day on high volume would be "ideal".  Once a bottom is found, a multi-month rally should lift the indexes by some 30%. Tuesday's 4% spike may be an indication of the initial intensity of the rally.”

In harmony with our assessment, we recommended ETF profit strategies for conservative, moderate and aggressive investors and highlighted ETFs linked to sectors that have been beaten down the most. These ETFs included the Vanguard Financials ETF (NYSEArca: VFH), iShares Dow Jones US Consumer Services ETF (NYSEArca: IYC) and Vanguard Industrials ETF (NYSEArca: VIS).

For aggressive investors we recommended leveraged ETFs such as the Ultra Financial ProShares (NYSEArca: UYG) and Ultra S&P 500 ProShares (NYSEArca: SSO). Leveraged ETFs aim to deliver twice or triple the performance of the underlying index. ProShares offers a series of double leveraged ETFs while Direxion offers triple leverage for high octane performance.

The emergence of sector short ETFs adds another facet of versatility to sector investing. Short ETFs aim to deliver 1x, 2x or 3x the opposite or inverse performance of the underlying index. Obviously, short ETFs have been the best performing asset class ever since the market topped in 2007.

Leverage, of course, is a double edged sword; it can work for or against you. $10,000 invested in the UltraShort Financial ProShares (NYSEArca: SKF), a double leveraged short ETF, from January 6th to March 9th, 2009 would have grown to nearly $25,000 while the same amount invested in the Ultra Financial ProShares (NYSEArca: UYG), a double leveraged long ETF,  would have shrunk to about $4,500.

Obviously timing is crucial. Another fact to keep in mind is that leveraged ETFs aim to replicate a multiple of the index’s DAILY performance. Due to the compounding effect of leveraged returns, long-term performance numbers tend to deviate from the index’s performance. This deviation works in the investor’s favor during directional market and against during volatile, range-bound markets such as the last quarter of 2008.

The January 2009 high in the Dow Jones (NYSEArca: DIA) and other indexes provided to be an ideal entry point for short ETFs. On December 15th, the ETF Profit Strategy Newsletter warned of the following: “Optimistic sentiment, which should be more visible above Dow 9,000, gives way to further declines. The best target for a low is 6,700 for the Dow and 700 for the S&P 500. Extreme pessimistic sentiment may drive the indexes even towards Dow 6,000 and S&P 600. Once the new lows are reached, the markets should stage the biggest rally seen since October 2007.”

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The Dow sat above 9,000 from January 2nd to January 6th before starting a 2,600 point decline. ETFs recommended at the time included the UltraShort Financial ProShares (NYSEArca: SKF) and UltraShort S&P 500 ProShares (NYSEArca: SDS).

While there is still more life left in this rally, investors should be cautious about the market’s long-term prospects. Currently investor skepticism outweighs optimism. This will eventually change. In fact you will likely see a change in sentiment reflecting a “the worst is behind us” spirit which will signal yet another change in the market’s direction.

Will a retest of the March lows constitute the worst case scenario or will this bear demand another 50% drop before hitting rock bottom?

Wall Street analysts and economists obviously don’t have a handle on the market’s direction otherwise the 54% top-to bottom drop wouldn’t have been such a surprise.

Fundamental indicators with a historic track record of accuracy however can identify the true value of equities. A look at dividend yields, P/E ratios and investor’s sentiment reached at historic market lows (such as during the Great Depression) compared to current levels provides a crystal clear forecast.

The March issue of the ETF Profit Strategy Newsletter contains a detailed analysis of the above indicators along with the Dow Jones measured in the only true currency, gold (NYSEArca: GLD). The results are as surprising as they are objective and certainly more accurate than what Wall Street and the media has been feeding us.
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