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TheStreet Open House

3 Reasons Stock ETF Investors Should Tread Lightly

Stocks in this article: XMEEWAEZAVCR

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( ETF Expert ) -- In the dark days of late September/early October, China hinted that it was nearing the end of its monetary and fiscal tightening campaign. At the same time, leaders in the European Union demonstrated several "come together" moments that removed the probability of an imminent collapse. And virtually every fundamental measure of "value" favored stocks over alternative assets.

In fact, I extolled the virtues of a Q4 stock rally in numerous features:

  • 3 Reasons For Increasing Your Allocation To Stock ETFs in Q4
  • 7 ETFs For The "Technical Turnaround" In Market Sentiment
  • "Cash Dash" May Suggest That Pan-ETF Selling Is Near Completion
  • You need to be patient before adding more to your stock ETF plate.

    That said, the extreme nature of the bounce higher screams for an examination. Is the coast really clear? Will Q4 continue to surge, trade sideways, or even turn bearish once more?

    From my vantage point, scores of stock ETFs will finish 2011 much higher than they finished today. Nevertheless, you'll want to be judicious in adding more risk; that is, you'll want to wait for inevitable selling pressure to resurface.

    The "easy gains" have been made. Here are three reasons why you now need to be patient before adding more to your Stock ETF plate:

    1. European Banks Don't Trust Each Other... Yet. Since July, I have talked ad nauseum about rising three-month LIBOR rates. Well guess what? They're still going up.

    For example, in my Aug. 15 commentary, I talked about the fact that LIBOR had jumped 17% from 0.25 to 0.293. By Sept. 15, LIBOR had reached 0.34 and by Oct. 15, three-month LIBOR reached 0.40. Today it is pushing 0.43.

    The increased cost for European banks to borrow from one another has risen 72%. A plan to recapitalize financial institutions may not mean a hill of beans if those institutions don't trust one another.

    2. Earnings Haven't Yet Driven the Market Higher. The researchers at Bespoke detailed the average return for individual stock performance on the session following the earnings report. The result? -0.21%. In other words, with 62% of corporations beating revenue projections and 71% exceeding earnings estimates... nada.

    It follows that investors aren't really seeing "value" in stocks as much as they are reacting to "good news" out of Europe. Now that the Europe news is priced in -- more or less, stocks may need a separate catalyst.

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