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