Fabian Says Sell ETFs, Raise Cash

03/07/2007 12:00 am EST

Focus:

Doug Fabian

Editor, Successful ETF Investing, ETF Trader's Edge, Weekly ETF Report, and ETFU.com

Ticker symbols XLE, EWJ, XLV

Doug Fabian, editor of Successful Investing, has turned bearish on the markets for now and recommends some ways for investors to get defensive and even profit from the market's weakness.

The market meltdown that started last week isn't over yet. As a result, we want to adjust our portfolio to take advantage of current and future circumstances.

The first thing to do is sell the Energy Select Sector SPDR (XLE). Energy stocks weren't spared in this latest round of red ink and there is no reason to think that this sector's value is going to bounce back anytime soon. Take your money out of XLE and put the proceeds of the sale into the money market.

Monday's trading also sent the iShares Japan (EWJ) ETF below our preset stop loss of $14.30. So, we now are recommending that you sell this position and put the proceeds into the money market (cash).

The Health Care SPDR (XLV) did close above its preset stop loss of $32.80, but I also am recommending that you sell your position in XLV and put the proceeds into cash.

Why? Well, given the current market volatility and the rather tepid performance of health care stocks since our original purchase, I felt it best to clear the table of any allocations and wait out the current market storm under the shelter of the money market.

When the clouds blow away, we'll be able to get back into equities at very attractive levels. Remember that corrections are a healthy part of any bull market and this pullback is really what I've been suspecting -- and even counting on -- so that we can get back into stocks at a much safer, much less risky entry point.

One area of opportunity ripe for the taking is emerging markets. There's been a sharp decline there since about mid-February. And, that decline only has been exacerbated with the current sell-off.

Given this trend, I want to go aggressive on the short side of the emerging market equation. I want you to buy the ProFunds Ultra Short Emerging Markets (UVPIX), which is designed to deliver performance equal to twice the inverse of the Bank of New York Emerging Markets 50 ADR index. If the index falls 2%, then UVPIX will rise 4%.

You already should be taking a short position in this market by investing in the Short MidCap 400 ProShares (MYY)--and now, UVPIX. The rest of your portfolio should be in cash until we can get a better sense of what this market is going to give us.

(Editor's Note: Short selling is extremely speculative and leveraged funds amplify indexes' moves both ways. They are only for risk-tolerant investors who can afford to take steep losses.)

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