Investors breathed a sigh of relief as key US indexes rose for the shortened, pre-holiday weekend last week with the S&P 500 and the NASDAQ Composite rising to 2,640.87 and 7,063.44 respectively for a weekly gain of 2.03% and 1.01%. The indexes recovered as Tech stocks rebounded along with Financials. Most investors preferred to forget this quarter despite its strong momentum early on as it finished down some 1% depending upon your benchmark.
Michael O’Rourke, Chief Market Strategist at Jones Trading summed the mood up perfectly, “We are in a structurally different environment” since the market’s high. We take that to mean a change in leadership and continued volatility will affect the markets.
That’s good news for traders, but index investors in market cap weighted funds which favor momentum stocks should heed note. ETF traders should dig out those prospectuses to see just how their index is constructed. Choppy markets tend to favor active strategies over traditional market cap weighted indexes, so keep those prospectuses nearby and be prepared for sector and market cap rotations.
If indeed we are in a Bull Market correction, investors should be prepared to buy on any pullbacks but keep a cautious eye on interest rates. With the return of normal volatility to the markets, we cannot emphasize strongly enough that some stocks and bonds may lack the liquidity that used exist some 10 years ago due to changes in market structure. ETF investors should be mindful that in periods of high volatility, some thematic, fixed income and strategy ETFs could suddenly see widened spreads or any bids at all, particularly in the smaller funds – check the ETF Liquidity portion of the ETFG Red Diamond Risk Rating. Hence, investors should keep reserves and be prepared to take advantage of such opportunities.
In these times, Investors should use our ETF Exposure Report to see just what their exposure to momentum stocks is (i.e., the favored high tech names) across their ETF portfolio. One should be especially concerned if you find yourself overly exposed to the sector weightings in say the S&P 500.
Additionally, tools like our Select List and Risk and Reward Ratings should be used to evaluate the vast set of opportunities in the ETF marketplace. Investing in ETFs requires a new approach to macro investing, one in which investors are just beginning to realize.
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