On the Cusp of a Buy Signal

06/01/2009 1:00 pm EST

Focus: ETFS

Doug Fabian

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

Doug Fabian, editor of High Monthly Income, says his indicators are close to a Buy signal, and he likes two high-dividend-paying ETFs.

I think that we are staring at the very real possibility that the bear market rally that began back on March 9 could actually morph into a new Buy signal.

Now, I must humbly admit that I didn’t see this coming. In fact, I still remain skeptical that the worst is over for the economy and the stock market. But when confronted with the facts, only the fool deems those facts dismissible.

And what are those facts?

We are within 5% of a new Buy signal in our Domestic Fund Composite (DFC)—five domestic stock ETFs chosen to track the performance of the US growth fund market. As of May 18, the DFC was 2.27% below its 200-day moving average. Its confirming indicator, the Wilshire 5000 Total Market Index, was just 0.67% below its 200-day average. This means we could get a Buy signal in domestic equities virtually any day now.

We have found that the most accurate predictors of the market’s direction are the trends of the Wilshire 5000, our DFC, and the relationship these indices have to their respective 39-week moving averages.

A strong or rising market exists when the current prices of our indicators are higher than their 39-week averages. A weak or falling market is indicated when the current prices are lower than their 39-week averages. Comparison of the current price to the 39-week average reveals the current trend of the market and forms the basis of our trading rules. A Buy signal is generated when the DFC and its confirming indicator, the Wilshire 5000, both break above their 39-week, or 200-day, moving average.

There are two solid dividend-paying equity funds I like if and when we do get a Buy signal: the iShares Dow Jones Select Dividend Index (NYSEArca: DVY), and the second is the iShares S&P US Preferred Stock Index Fund (NYSEArca: PFF).

(Unfortunately, it is my view that stocks are still due for a 5% to 10% pullback fairly soon, and if that pullback happens after we’ve entered into dividend-paying equity ETFs, we could get whipsawed once again.)

DVY is an investment that seeks performance results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones Select Dividend Index. PFF seeks to track the price and yield performance, before fees and expenses, of the Standard & Poor’s US Preferred Stock Index. Both of these funds have solid yields, with DVY posting a 6.24% yield and PFF offering a yield of 10.35%.

Also, both funds contain some of the best dividend-paying and preferred stocks around, and both would be great additions to an income portfolio as soon as the time is right. (DVY closed at around $35.50 Friday, and PFF closed above $31—Editor.)

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