Rational Or Not, Investors Are Hunkering Down

Whether the economy is or isn't actually headed for a double-dip is mostly irrelevant at this point - investors are proceeding as if it is, forcing certain stocks higher and others lower as a result. The thing is, right or wrong, those aren't trends you want to tangle with. Rather, they're trends you side with - at least until the worrying is over. That could be October - the usual bear killer - or even later if we really are making an economic retreat.

So what can you do? I think the numbers here from some of the more popular sector ETFs speak volumes, as well as point the way. Let's take a look. (To learn more, see Sector-Based ETFs Spread Out Risk.)

IN PICTURES: 10 Reasons To Add ETFs To Your Portfolio

Yesterday's Laggards ...
Although there were a few straggling doubters of the recovery last March, by the latter part of the month, most agreed the worst was over and things were in an upswing. Translation? Investors should have been focusing on sectors that traditionally do well in early-expansion stages (growth), and should have avoided sectors that didn't offer much rebound potential (value).

While a couple of surprises popped up between mid-March of 2009 and late-April of this year - when the fears of a double dip were legitimized - by and large, we can see that aggressive mentality via the exchange-traded funds traders chose (or didn't choose) to buy.

Sector Fund	% Change March 2009 through April 2010
iShares Financials (NYSE:IYF)	147.9%
iShares Basic Materials (NYSE:IYM)	128.8%
iShares Industrials (NYSE:IYJ)	114.9%
iShares Technology (NYSE:IYW)	99.4%
iShares Services (NYSE:IYC)	93.7%
iShares Consumer Goods (NYSE:IYK)	62.5%
iShares Energy (NYSE:IYE)	55.8%
iShares Telecom (NYSE:IYZ)	53.2%
iShares Healthcare (NYSE:IYH)	45.9%
iShares Utilities (NYSE:IDU)	39.5%

Financials, industrials and basic materials led the way, as one would expect at the dawn of an economic rebirth. On the other end of the spectrum you'll find telecom healthcare, and utilities.... the 'safest' plays on Wall Street, and with little opportunity for growth.

... Are Today's Leaders
Now take a look at how each of those sector ETFs has performed since the July 2 bottom.

Sector Fund	% Change Since July 2 Bottom
iShares Utilities	8.4%
iShares Basic Materials	7.9%
iShares Telecom	6.7%
iShares Consumer Goods	5.5%
iShares Energy	4.0%
iShares Industrials	3.3%
iShares Services	2.8%
iShares Technology	1.6%
iShares Healthcare	0.8%
iShares Financials	0.3%

At the top of the list are telecom, utilities and basic materials - the safest plays on Wall Street, yet with little opportunity for growth (Sound familiar?) At the bottom of the barrel are the financials, tech stocks and healthcare, two of which had blazed the trail for a new bull market just a few weeks before.

What a turnaround. More than that though, what a huge shift in investor confidence. (To learn more, see Consumer Confidence: A Killer Statistic.)

The Bottom Line
The notion of value is a quirky one; just because a stock or sector should perform a certain way doesn't mean it will. That's an important point to make at this juncture, since some of the recent sector returns may not fully reflect their underlying values.

Folks, this is a sentiment and opinion dance as much as it's about value. This may be even more true when tensions are high like they are now. And right now, that sentiment is defensive thinking in anticipation of weakness on the horizon, at least according to the funds investors are gravitating toward or away from.

How long will it last? Great question - long enough for the market to get it all out of its system.

If we really are headed for a long-lasting double dip, this divergence could last for months. If it's just some jitters being stirred up, the divergence may only last a few weeks. In either case though, this separation has lasted long enough now that we can't just chalk it up to a little volatility.

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