Is it a Real Bottom?

10/13/2008 1:10 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, says we may not have seen a market bottom yet, but there are some opportunities.

Another week of record losses around the globe. There was plenty of news for the markets to digest: The central banks made coordinated rate cuts; the G7 met over the weekend to plot a coordinated response to the financial crisis; European governments arranged banking rescue packages; the US Treasury indicated it would take equity stakes in troubled financial institutions; and the dollar gained ground while commodities suffered.

Yet the financial system remains clogged, and without some relief soon, the matter will only get worse. The last step, many believe, will be US government backing of intrabank lending. Rumors are that could happen. This week helped trigger a global equity rally early Monday.

This is a global issues and not just a US crisis. The Dow Jones Industrial Average dropped below 8,000 for the first time since 2003. The FTSE 100 Index fell to a five-year low, Japan's Nikkei 225 index racked up the biggest weekly drop on record, and news of record declines cluttered the headlines all week. Over the past 12 months, more than $20 trillion has evaporated from the world's equity markets.

Crude oil fell below the $80-a-barrel mark Friday as commodities experienced further decline, with concerns the financial crisis the world into a recession and thereby decrease the demand. DB Commodity Index Tracking ETF (Amex: DBC) closed at $27.36, the lowest mark since October 2007.

The fertilizer and agriculture sector declined another 5% last week, yet that was considered one of the better performing sectors. PowerShares DB Agriculture (Amex: DBA) is the simple way to play this sector overall. Look for support near the $27 mark and a bounce back near $30.50.

Investment banks and brokerage firms fell a sickening 36% last week. The sector bounced off the lows on Friday intraday. That was a test of the July 15 low and is likely to bounce from there. The G7 meeting and comments from Treasury Secretary Henry Paulson over the weekend could lead to some buying. The SPDR Series KBW Bank (Amex: KBE) and SPDR Regional Banking  (Amex: KRE) ETFs are two options to take advantage of the move short-term.

Yields on ten-year US Treasury Bonds are creeping higher, ending the week above 3.8%, adding more than 35 basis points. I expect the yield to rise near the 4.7% range over the next six to 12 months. The way to play the move would be to use ProShares UltraShort Lehman 7-10 year Treasury ETF (Amex: PST). This is a leveraged fund, so make the necessary adjustments to any positions to account for the increased risk.

Oil closed near $77 per barrel Friday (although it rallied back above $80 early Monday) as the fear of a global recession depressed the outlook for consumption. The move down has been almost as quick as the move up. I would watch the US Oil Fund (Amex: USO) for a short-term move back near $75. The close on Friday was $66.50. Be patient, and let the trade develop.

Meanwhile, the media was full of speculation and called for a near-term bottom. One headline called it the opportunity of a generation. While I wouldn't disagree with the idea, it is important to put money to work in a disciplined way at this point.

The challenge for the broad market remains the credit crunch. The economic slowdown is likely to accelerate and will continue to weigh on the overall markets. A bounce at these levels should be taken for just that--a bounce. The bottom is yet to be established.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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