It’s Time to Dump Stocks

11/13/2007 12:00 am EST

Focus: MARKETS

Doug Fabian

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

Doug Fabian, editor of Successful Investing, says the market has fallen below key support levels and he recommends selling several domestic exchange traded funds.

[Last week] the stock market sold off sharply on renewed fears of high oil prices, a weakening US dollar, and more trouble in the financial sector. We witnessed a veritable orgy of market selling: this was the worst three-day performance for stocks since 2002! 

The major market averages all suffered heavy losses [last week], and when the dust settled, both our Fabian Domestic Fund Composite (DFC) and the Wilshire 5000 Index had closed below their respective 39-week averages.  Based on the rules of the Fabian Plan, I am issuing an immediate sell signal for all domestic stock positions, as well as the emerging markets. 

You should sell all shares of the following ETF holdings and place the proceeds in the money market (cash): Vanguard Total Stock Market (AMEX: VTI), iShares MSCI Emerging Markets index (AMEX: EEM), Energy Sector SPDR (AMEX: XLE), Technology Select Sector SPDR (AMEX: XLK), HealthCare Select SPDR (AMEX: XLV).

I fear things are going to get a lot more difficult before they start getting better. Why do I think things could get worse?  Well, the subprime chickens continue coming home to roost, and until the gates of that hen house are finally shut, we could see more selling. I think Wall Street is really starting to wake up to that fact now, and that may cause a lot more of what we saw last week.

Another cause for concern here is the economic picture. Last week Federal Reserve Chairman Ben Bernanke said he expects the economy to "slow noticeably" this quarter. He also said the dollar’s weakness “may have some effect on import prices.” This fact was confirmed Friday by the Commerce Department, which said that US import prices soared last month at their fastest pace since early last year. Adding insult to injury was the University of Michigan’s preliminary November consumer sentiment index number, which was the weakest since October 2005.

This flight to quality has many investors seeking the safety of Treasury Bonds. That market sentiment has been a positive influence on our iShares Lehman 20+ Year Treasury Bond Fund (NYSE: TLT).

From a technical perspective, the recent upward move in long-term Treasury Bonds has been quite steep. I would not be surprised at this point to see a modest pull back in the price of TLT as the market adjusts to these over-bought price levels. Remember that we own TLT not only for the capital appreciation, but also for the monthly income stream that currently is generating a yield of more than 4.6% annualized.

So, is all hope lost? Definitely not!  I am very optimistic—in fact more so than I have been in quite a while—that once the selling finally calms conditions are going to be ripe for a really sustainable bull market.

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