EC What The Daily 1% Price Swings Mean For ETF Investors

In the first half of the U.S. stock market bull (i.e., 2009-2011), 10%-19% corrections occurred annually. That has not been the case in the second half of the bull market. Instead, the frequency as well as the duration of setbacks lessened. There were several 7% sell-offs in 2012, a couple of 5% pullbacks in 2013 and a number of shake-ups here in 2014.

At the present moment, the NYSE High-Low Index suggests that our collective assets may be banging on a bearish wall. If recent patterns hold, however, the warning signal will promptly fade. Both the Jan-Feb decline as well as the July-August dip reversed direction quickly. If the prospect of losing money in U.S. equities is to shift from urban legend to harsh reality, the NYSE High-Low Index would need to move down into the “30s” and reside there for a month or more.

$NYHILO YTD

It rarely makes sense to favor “all-in” and/or “all-out” bets on market direction. On the other hand, reducing one’s overall allocation to certain asset classes is sensible when enough yellow flags wave tempestuously. Whether one employed unemotional stop-limit orders and/or trendlines in March-April – whether one employed those tools in July-August – reducing or eliminating small-cap U.S. stock exposurehas been practical. Not only are the valuations absurd, but the dwindling reward no longer justifies the risk of participation.

It is not too late to cut back on funds like iShares Russell 2000 IWM. When the 50-day moving average for IWM crossed below its 200-day moving average in 2011 – an event that is affectionately referred to as “a death cross” – the exchange-traded small-cap proxy plummeted another 20%-plus. (Note: The cross for this ETF has not yet occurred, though it has occurred for the Russell 2000 Index.)

IWM 50 200 4 Years

Small caps are not the only ETF canaries in the mines. Commodities via Greenhaven Continuous Commodity GCC, emerging markets via iShares MSCI Emerging Markets EEM and higher-yielding bonds via SPDR S&P High Yield Bond JNK are each below respective long-term moving averages. Weakness in these areas – coupled with ongoing strength in longer-term U.S. Treasuries – indicate that large-cap U.S. stock ETFs may follow. While the largest companies trading on the U.S. exchanges may cough up earnings and revenue stories that beat expectations, they’re still not capable of carrying the entire weight of a global economy on their shoulders.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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