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Using Market Signals to Get an Overbought ETF at a Better Price

NEW YORK ( ETF Expert) -- The more investors get discouraged by low-yielding Treasuries , the more they've chased assets that are further along the risk ladder.

For example, one month earlier, iShares Investment Grade Corporate Bond (LQD) had a trailing 12-month yield of 4.1%. After a month-long surge in buying activity, however, LQD is yielding closer to 3.9%.

Granted, 3.9% may still be an attractive yield to income enthusiasts. Nevertheless, when an ETF goes on a vertical trek that puts it into overbought territory by several measures (e.g., RSI above 70, deviation above a key trendline, etc.), the asset is likely to cool off.

Let the air deflate from LQD's balloon a bit before acquiring additional shares. A period of flattening out or depreciation of 2% to 2.5% would do the trick.

Yield-hungry investors have been equally cavalier about pursuing preferred stock shares. Unlike common stock, preferreds pay fixed dividends that will not fluctuate. They are the "hybrid cars" in the investment world -- paying a fixed rate of return like a bond instrument and having capital appreciation potential like common stock.

The big problem with preferreds? Roughly three-quarters of them are issued by the financial sector. It follows that concerns about the global financial system have made this asset class far more volatile than in years prior to 2008.

The chart below shows just how quickly investors abandoned iShares S&P U.S. Preferred (PFF) in May-June, and how enamored others became in the dividend days of June-July.

Here, I have two suggestions for the yield-famished. You might choose to wait for an inevitable "risk-off" period where concerns about European countries or European banks cause profit-taking in PFF. Or you might consider the newly launched Market Vectors Preferred Excluding Financials Portfolio (PFXF). The latter may take some of the volatility sting out of preferred share investing, but may also present a less attractive annual yield.

Finally, we have one of the most successful asset classes in 2012: mortgage REITs.

These companies borrow money at ultra-low short-term rates, then invest in mortgage-backed securities. They profit from the spread between their borrowing rate and the mortgage-backed security rate. As long as the spread remains favorable, "mREITs" tend to do well.
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