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) -- Since the beginning of earnings season, I've been discussing the rotation into defensive stock sectors. Now, nearly everyone seems to be writing something about it. That said, you'll find three links to my "defensive sector" commentary below. In the articles, you'll find observations pertaining to changes in everything from relative strength to volume breadth, valuations to new 52-week highs. May 3, 2011: " Sector ETFs: What The New Leaders Are Telling Investors" April 28, 2011: "Volume Breadth Favors Non-Cyclical Defensive Sectors" April 15, 2011: "In Earnings Season, Safer Sector ETFs Are Winning" Still, throughout the last month, I refrained from making bearish or bullish prognostications. Rather than holding firmly to a "this-must-occur" bias, I let the information guide my decision-making. More specifically, I choose investments based on a wide variety of fundamental, historical and technical data. Then I let unemotional stop-limit loss orders protect positions for a large gain, small gain or small loss. Of course, not everyone has the patience or discipline to employ stop- limit loss orders or hedges properly. It follows that many readers simply want a "quick pick" or market direction "call." Rather than insist that an event is imminent or certain, when the exact opposite may be the case, I simply wish to offer ETF evidence of a probable correction. How you use the evidence depends upon your personal approach to risk management as well as your current positions. (For instance, an individual with 50% cash may be putting together a list of ETFs to buy when stock ETFs pull back significantly. In contrast, fully invested folks may want to lighten their exposure to risk assets.)
1. iPath Copper ( JCC).
Long-time readers know that I talk about Dr. Copper frequently. It may be one of the best indicators of investor confidence (or lack thereof) in the global industrial cycle. Therefore, your eyes should open up wide when JJC falls below a 200-day moving average. The last time that it happened? April to May 2010... at the inception of the S&P 500's nasty -17% correction.
2. Vanguard Extended Duration Treasuries ( EDV).
"Bond king" Bill Gross, uber-hedger Doug Kass and commodities maven Jim Rogers share one thing in common. They're all shorting U.S. Treasury debt. (Ironically enough, they each appear willing to fight the Fed; perhaps the end of quantitative easing has already been written on the "Wall.") We all know that U.S. Treasury debt is undesirable... at least at these yields and at these bogus ratings. Nevertheless, whenever the world at large gets spooked, investors still run to the perceived safety of the U.S. government. The last time that the longest maturity treasury ETF -- Vanguard Extended Duration - climbed above a 200-day moving average for a substantive period of time? Yep... April/May 2010.
3. iShares MSCI BRIC Fund ( BKF).
It has been called the emerging growth story. It is a simple concept. The vast majority of the contribution to global economic growth comes from the four majors: Brazil, Russia, India and China. It's one thing for the BRIC nations to collectively underperform for six months or 1 year. Their governments have been fighting currency appreciation, speculative bubbles, investment flow, socio-economic unrest and so forth. Yet it's quite another thing to have all four of these countries struggle. ETFs like China 25 ( FXI), WisdomTree India ( EPI), Market Vectors Russia ( RSX) and iShares MSCI Brazil ( EWZ) are individually battling to stay above a 200-day MA; the iShares MSCI BRIC is already failing to hold a long-term uptrend. You can listen to the ETF Expert Radio Show "LIVE", via podcast or on your iPod. You can review more ETF Expert features here.
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