Glitter amid the Gloom

10/27/2008 11:27 am EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, actually finds some ETFs that look attractive in the long run.

The continued search for a market bottom has become an obsession for investors and the media. Every piece of news becomes a market-moving event. Friday morning set up as the climax sell-off that would have defined a bottom—the CBOE Volatility Index (VIX) spiked to 87 at the open on Friday. But the result was a down open that never became much more than another 500-point swing intraday on the Dow Jones Industrial Average.

The gains from the week of October 13th were easily erased last week as selling returned to the forefront. Along with a litany of concerns, the markets lost ground. The Dow fell by 5.3%, the Standard & Poor's 500 index lost 6.7%, and the NASDAQ Composite index was off by 9.3%. 

From my perspective, the bottom isn't as important as finding opportunities that result from the selling. The old saying, "a watched pot never boils," may apply here. So, as the search for the bottom continues, here are some sectors worth watching for potential opportunities.

Among financials, the regional banks are in play. The acquisition by PNC Financial Services Group (NYSE: PNC) of National City (NYSE: NCC) on Friday was an indication that we are at the beginning of consolidation in this sector. KBW Regional Bank SPDR (Amex:KRE) is the ETF to watch. Support is near the $25 mark, and the close on Friday was $27.50.

Meanwhile, fixed income is oversold because of the panicked flight to quality in US Treasurys. The selling of quality corporate bonds can be seen in the chart of iShares iBoxx $ Investment-Grade Corporate Bond (NSYEArca: LQD), which hit an intraday low of $80 per share—a 20% decline in just two weeks. These are investment-grade corporate bonds, not junk. The fund closed Friday at $88.35, and it pays a 5.5% dividend yield. The risk/reward ratio here is worth watching over the next 12 to 24 months.

Energy is another oversold sector because of the decline in demand for oil, and the resulting plunge in crude prices. Sentiment remains negative, as crude prices dropped more than three dollars per barrel to around $64 even after the Organization of Petroleum Exporting Countries (OPEC) announced it would cut production by 1.5 million barrels per day.

I am looking for a test of the $60-a-barrel mark and then a bounce along with the broad markets. Two places to look are US Oil Fund (Amex: USO), a play on crude oil prices, and iShares Dow Jones Energy Sector (NYSEArca: IYE), which tracks a broader energy index. Support for IYE is $24.70 and a move above $30 would be bullish in the short term. The fund closed at $26.66 on Friday.

Overall, the markets are still volatile while they build a base or a bottom. This is the best time to build positions methodically. I am looking at each of these sectors with a longer term time horizon (12-36 months). 

If we bounce off support of the October 10th lows again it will be just that—a bounce. Play that bounce and use trailing stop-losses on any short-term plays. I expect another retest of these lows with some climax selling before this is over. Laddering into positions would allow you to take advantage of any additional selling. Above all, be patient and disciplined.

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

Related Articles on ETFS

Keyword Image
The Omen
12/07/2017 10:50 am EST

The probability of an equity market correction over the next few months is slim to none, so there co...