This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why An Upcoming Pullback Could Whack Financial ETFs

NEW YORK ( ETF Expert) --U.S. stocks ( S&P 500) have packed on Olympic-sized gains through the initial eight weeks of 2013. Federal Reserve policy uncertainty aside, 6%-plus capital appreciation on low volatility is impressive by any measure.

The bulk of the run-up is attributable to industries tied to economic growth and enhancement. Sector ETFs that represent financials, industrials, technology and energy have been the most prominent performers. This is particularly remarkable when one considers the high probability of a sequester drag on the U.S. economy.

However, it is unusual for a diversified investment like SPDR Select Financials (XLF) to catapult 20% without a modest amount of resistance. It's even more uncommon for traders to ignore the temptation to reduce their exposure. In fact, rallies that go unchecked are often prone to temporary reversals that may erode half of one's unrealized profits.

It follows that a 5% corrective phase for the broader market could see XLF drop 10%. In fact, with XLF 12.5% above its long-term (200-day) trendline, you might even see a double-digit percentage drop.

Sector ETFs: Distance Above Long-Term Moving Average
Health Care Select Sector SPDR (XLV) 9.4%
Consumer Staples Select SPDR (XLP) 8.4%
Vanguard Telecom (VOX) 4.7%
Utilities Select Sector SPDR (XLU) 3.8%
Financials Select Sector SPDR (XLF) 12.5%
Industrials Select Sector SPDR (XLI) 10.5%
Energy Select Sector SPDR (XLE) 9.0%
Guggenheim Equal Weight Tech (RYT) 8.9%
Consumer Discretion Select SPDR (XLY) 8.5%
Materials Select Sector SPDR (XLB) 5.3%

To be frank, most of the cyclical sector ETFs have "gotten ahead of themselves." The selling that comprised the "worst two-day stretch" of 2013 did little to change that reality. Even the so-called safer non-cyclicals like consumer staples and health care are over-extended. Telecom and utilities are within an acceptable range, but they may be the most over-valued from a fundamental point of view.

Still, it is the financial segment that I am particularly concerned about. How many times can the media point to accommodative monetary policy and a real estate recovery? It is a desirable backdrop, no doubt. Nevertheless, a government-backed housing administration is not immune to upcoming automatic spending cuts. The U.S. Federal Housing Administration would not be able to process as many original loans or "refis."

There's more. Banks are still not lending at a sufficient pace to generate profits for investors. Excess cash that sits in the banks earns next-to-nada. Worse yet, even if banks begin lending like gangbusters, the value of those outstanding loans would decrease over the decade as interest rates rise.

Unless prevailing rates are lower than they are five to 10 years out, one can expect outstanding loans to hinder bank profitability. We might also expect demand for loans to decrease alongside any substantive increase in interest rates.

I am not advocating that an investor abandon equities or XLF. Many of my clients maintain broad-based exposure via iShares Russell 1000 (IWB), dividend exposure via Vanguard High Dividend Yield (VYM), sector exposure via SPDR Select Consumer Staples (XLP) and foreign developed exposure via iShares MSCI Australia (EWA).

I am suggesting that it is critical to have an exit plan. How you choose to protect against extreme downside risks -- stop-limit loss orders, hedges, trendlines, put options -- may be a matter of personal preference. In contrast, not having a protection plan is akin to buying a $1,000,000 California home without earthquake insurance.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

Gary Gordon reads:

Real Clear Markets
Jeff Miller
Charles Kirk
On Twitter, Gary Gordon follows:

Jonathan Hoenig
Doug Kass
Hard Assets Investor

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
AAPL $92.25 -1.10%
FB $118.83 0.87%
GOOG $706.77 0.76%
YHOO $36.80 -0.38%
TSLA $212.53 0.47%


Chart of I:DJI
DOW 17,636.88 -23.83 -0.13%
S&P 500 2,045.92 -4.71 -0.23%
NASDAQ 4,698.7210 -18.3730 -0.39%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs