Through the first two and a half months of 2012, the S&P 500 has gained 12% traded at the best level in four years. The bullish action has given investors a reason to be giddy again and exciting about buying stocks and ETFs. (For more, see How To Pick The Best ETF.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The one problem with the current positive attitudes is that investors are just now beginning to warm up to stocks again. I do not believe they are too late to make money in stocks, however, considering the S&P 500 is up 28% from the October low, the index is overdue for a pullback.

The recent intraday high for the S&P 500 was 1414 before a few days of selling began this past week. According to the charts and the sentiment, it appears the index and the overall market is due for a pullback. The support level on the S&P 500 is 1360-1370 and could be the next level to begin buying. A pullback to the support level would represent less than a 5% sell-off, well within a normal bull market pattern.

Investors looking to put more cash to work in the stock market should be ready in the event the pullback occurs as I predict. Four ETFs that could be attractive buying opportunities after a market sell-off are listed below.

The Vanguard Information Technology ETF (ARCA:VGT) invests in 413 stocks that focus on computer hardware, software, semiconductors, etc. The largest holdings are the who's who in technology; Apple (Nasdaq:AAPL), Microsoft (Nasdaq:MSFT) and IBM (NYSE:IBM). The ETF is up 20% in 2012 and is past due for a pullback to support near $70/share. The ETF is low-cost with a 0.19% expense ratio and pays a SEC yield of 0.82%.

The Market
Investors that do not want to attempt to pick a sector, but want to participate in a stock market rally in the U.S. should turn to the SPDR S&P 500 ETF (ARCA:SPY). The very low expense ratio of 0.9% makes the ETF that tracks the popular S&P 500 index conducive to all investors. The yield on the ETF is 1.9%, not much below the yield on the 10-year Treasury bond. Similar to VGT, the ETF needs to pullback and the support to watch is at the $136 area.

One of the best-performing and most attractive charts for an international ETF is the iShares Philippines Investable Market ETF (ARCA:EPHE). The 22% gain in 2012 should keep investors away from chasing performance and buying today. But if the pullback comes, it will likely send EPHE back down to support near the $26.50 area. The ETF is made up of 38 stocks and charges an expense ratio of 0.59%. Approximately 40% of the ETF is invested in financial stocks, followed by another one-third in the industrials and utilities. EPHE is considered above average risk for most investors and caution should be taken.

Investors that want even more risk can turn to a leveraged ETF that implements a spread strategy. The FactorShares 2X S&P 500 Bull/T-Bond Bear (ARCA:FSE) will seek to establish a 200% long position in the S&P 500 and the opposite in the U.S. Treasury bond futures. Basically, the bet is that stocks will rise as U.S. bond values fall. The ETF was up as much as 31% in 2012 and is an extremely aggressive, short-term trade.

The Bottom Line
There are two important factors that will increase the probability of making money on a pullback. First, be patient and wait for the market and the ETFs to pull back to the support levels. Second, after purchase, place a stop-loss order to protect against a continued sell-off that could lead to big losses on the new investments. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: Vanguard Total World Stock

    Learn about the Vanguard Total World Stock exchange-traded fund, which invests in stocks located in numerous countries with a high level of diversification.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  3. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Products

    Learn more about the BioShares Biotechnology Products fund, an exchange-traded fund that is focused on producers of FDA-approved drugs.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR EURO STOXX 50

    Learn about FEZ, the Euro Stoxx 50 ETF. FEZ tracks the 50 largest companies in Europe, making it the Dow Jones Industrial Average of Europe.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraShort Nasdaq Biotech

    Learn more about an innovative inverse-leveraged sector exchange-traded fund, or ETF, the ProShares UltraShort Nasdaq Biotechnology fund.
  6. Chart Advisor

    Value Stocks Offer Stability in a Volatile Market

    With volatility on the rise, investors are turning to segments of strength such as value stocks. We'll take a look at several ETFs that could be worth a closer look.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
  10. Mutual Funds & ETFs

    ETF Analysis: First Trust Tactical High Yield

    Find out more about the First Trust Tactical High Yield fund, a debt security-focused ETF designed to produce high income.
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  4. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  5. Lion economies

    A nickname given to Africa's growing economies.
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!