3 Reasons to Go Easy on the Stock ETFs

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 March of 2011, I have maintained more conservative portfolios for my clients than normal. There was no shortage of reasons. For instance, the uprisings throughout the Middle East meant higher oil prices. And the natural disaster in Japan meant disruptions to world trade.

Granted, stocks have a way of climbing the proverbial wall of worry. Yet stocks also tend to look three to six months ahead. With QE2 ending in June, and the possibility of a prolonged debt debate in D.C. during July and August, I continued raising my allocation to cash and income-producing assets in May.

The May-June swoon seemed to validate the decision. We witnessed a technical default for Greek bonds, extreme pressure on country debt throughout the European Union, and exceptionally dismal data on the U.S. economy.

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Granted, corporate earnings in July were phenomenal. And that fact alone during the July earnings season kept the market near its April 2011 highs. But seriously, how much bad news could the market discount?

When the markets collapsed towards the 1100 level, I did make selective purchases. I still like the yield that comes from the energy pipeline partnerships a la JP Morgan Alerian ( AMJ). I remain a steadfast supporter of Asian neighbors to China, particularly iShares Malaysia ( EWM).

In addition, I may be nibbling at Apple via PowerShares QQQ ( QQQ). I may even be intrigued with more iShares High Yield ( HYG) due to a widening spread between high-yield corporates and same duration treasuries.

Nevertheless, this rally that restored the S&P 500 back above 1200 is extremely suspect. While the odds of a recession may only be one in three, the market at -11.5% off its April highs may not be fully pricing in a contraction in earnings.

Here are three reasons to allocate a bit less to stock ETFs than you might normally allocate.

1. Across-the-board Selling on Strength: One of the healthier signs of a real rally -- as opposed to a relief rally or dead-cat bounce -- is the absence of investors selling into strength. However, investors seemed to relish the opportunity to take profits on Monday. Investors sold $240 million of SPDR S&P 500 ( SPY), $140 million of the Healthcare Select SPDR ( XLV) and $90 million of Basic Materials ( XLB).

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