The odds are that oil prices are headed higher in the first quarter of 2007. In each of the past five years, crude oil futures have jumped an average of almost 12% in the quarter. Even in 2005, a weak year for oil prices, the gain came to almost 7% in the quarter.This is the kind of investing situation that ETFs (exchange-traded funds) were made for. With an ETF, an investor can buy an entire sector with one trade and one commission in order to quickly take advantage of a short-term situation like this. And then, with just one trade and commission, an investor can just as easily sell when the market dynamics change. The coming year is shaping up as one that will be dominated by strong trends with limited life spans such as this one. I can see similar patterns developing during the year in homebuilders, gold, airlines and Japanese equities. Investors who know their way around ETFs should be able to use them to make solid short-term trading profits. You don't need to master the ins and outs of every ETF (plus near relations such as HLDRS, which track a basket of stocks rather than an underlying index) to use them profitably in 2007. In fact, I think you can do well with just five ETFs. You might call them "all the ETFs you'll need for 2007."
OilWhy: In 2007, with OPEC set to cut production again in February and U.S. inventories projected to show an 82-million-barrel decline -- more than five times the average fourth-quarter decline over the last five years -- the odds are good that we'll see a strong move up in oil prices again in the first quarter of 2007.
HomebuildersWhy: The stock market is starting to look past the downturn in home sales and to anticipate a recovery in the second half of 2007. The sector is by no means out of the woods. Building permits, an indicator of future home starts, fell 3% in November. But inventories are starting to edge downward in some regions, and housing starts climbed 6.7% in November to an annualized rate of 1.59 million, up from 1.49 million in October and above the 1.55 million expected by economists for November.
GoldWhy: Gold is the best hedge against a falling dollar. The U.S. dollar is headed lower in 2007 on a combination of factors:
- A slower rate of economic growth in the U.S. than in 2006 (especially relative to the rest of the world).
- Interest rate increases in Europe and (still likely but delayed) in Japan while the U.S. is on pause.
- The continuing huge U.S. trade deficit.