ETFs Count on Tech, Financial Rebound

NEW YORK (TheStreet) -- Financial ETFs took a pounding on Friday in the wake of Bank of America (BAC) and Citigroup (C) earnings, but there's still hope for the sector with Goldman Sachs (GS), which reports Tuesday.

Investors may instead want to focus on technology, where IBM ( IBM) stands a better chance of sparking a broad sector rally.

Shares of Goldman have been bucking the market's trend over the past few days. After a deal with the SEC ended the civil fraud prosecution against the firm, investors sent up shares nearly 6% since Wednesday's close. Shares even managed a slight gain during the Friday sell-off that sent BAC shares down 9% on the day.

Additionally, the company's positive stock performance dramatically contrasts with the trend of its earnings estimates, which are down more than 50% in the past month and 10% in the past week. That puts Goldman in a decent position to beat its estimates and rally.

Nevertheless, Goldman has only managed one sustained post-earnings rally in the past year. This took place last summer, when the firm beat its earnings and received positive comments from Meredith Whitney, an analyst who had maintained mostly bearish opinions on the financials.

Echoing last July, investors are questioning whether the stock market and the financial sector can move higher. Since April 19, iShares Dow Jones U.S. Broker Dealers ( IAI) -- which has 10% of assets in Goldman Sachs, its No. 1 holding -- has lost 18% through this morning. By comparison, Financial Sector Select SPDR ( XLF) is down about 16% over the same period. The SPDR S&P 500 ( SPY) is down more than 11%.

Last year, IAI, XLF and SPY traded higher in July, but the gains slowed to a crawl after a blistering rally from March into May. Goldman's earnings sparked a financial rally by generating a shift in sentiment.

This time around, investors looking to play another sentiment shift here should consider IAI for a short-term gain, while XLF should perform better over the longer term, as the big banks have further to rebound.

In lieu of financials, the best play going forward may be technology. Investors are growing bullish on the sector thanks to several strong trends, including a technology upgrade cycle.

New chips from Intel ( INTC), a new operating system from Microsoft ( MSFT), and new technologies such as cloud computing are creating supply, while most companies haven't invested in technology since 2007 or 2008, leading to pent-up demand.

One company poised to benefit is IBM, which reports after the bell today. The company relies on business more than consumers, a major advantage in this environment. Analysts expect IBM earned $2.58 per share in the previous quarter, a consensus estimate has been unchanged over the past 90 days. Given the strong report from Intel, which was the best quarter in the company's history, I think IBM is likely to beat its numbers.

Later this week, Apple ( AAPL), Yahoo ( YHOO), eBay ( EBAY) and Microsoft report earnings.

Over the weekend, Barron's published two bullish articles on technology shares, one on Intel and the PC market, and a cover story on Google ( GOOG).

The tech sector sold off along with the broader market, but IBM and Microsoft should benefit from the same factors lifting Intel, while Apple is a likely winner as usual. Good earnings plus positive sentiment should inspire a rally.

For a diversified play, iShares Dow Jones U.S. Technology ( IYW) is a solid technology ETF that has 9% of assets in IBM, 10% in Microsoft, 12% in Apple, 6% in Google and 5% in Intel.

-- Written by Don Dion in Williamstown, Mass.

At the time of publication, Dion Money Management did not own any of the equities mentioned.

Don Dion is president and founder of Dion Money Management, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.

Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.

More from ETFs

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

60 Seconds: What's the Difference Between an ETF and a Mutual Fund?

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Video: Why Shark Tank Star Kevin O'Leary Is Doubling Down on Internet Stocks

Simple Investing Strategies Stand the Test of Time

Simple Investing Strategies Stand the Test of Time

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

This Technology ETF Could Be Signaling a Looming Tech Stock Rout

The End of Retailpocolypse? This Retail ETF Is Soaring

The End of Retailpocolypse? This Retail ETF Is Soaring