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Where The ETF Bulls and Bears Are

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Where The ETF Bulls and Bears Are

3 asset classes with potential, and 3 others with high risk

In addition to the core list of individual stocks I follow and use in client portfolios, I closely track a list of 100 ETFs. That ETF list covers a wide variety of market segments that span the globe. There are stocks, bonds, commodities, income-oriented areas, specialty industries, etc. Together they allow me to watch and listen as the market develops its ongoing “story.”

Note that these are not recommendations. Rather, they are market areas that, based on the metrics I use, are sending stronger signals than most. Everything I do as an investor involves estimating the trade-off between potential for gains and the potential for major loss in a stock or ETF.

After all, nothing is certain in investing. Just because an investment has a strong probability of being successful, that does not mean it will be. This is like how a player that rarely hits home runs will sometimes hit one out of the park. And, the way I use that information may be different than the way you might choose to use it.

Here is what I see from within those 100 ETFs right now. These are based on an intermediate-term view, which means projecting over the next 3-6 months. I will admit that this is not the most exciting list I have ever come up with. As I see it, the broad stock market is in a state of “churn.” That is, it neither looks very bullish or bearish. At times like this, we need to go deeper to find potential “movers” in either direction.

Good return/risk tradeoff

Asia Stocks – whether it is Japan or Southeast Asia, the markets in that part of the world have been chronic under-performers versus the S&P 500. As the trade war continues, there is reason to believe that the economic shocks will normalize. That could bring new, positive attention to the laggard Asian stock markets.

Aerospace & Defense Stocks – defense spending continues to be one of the few areas of the U.S. budget that is increasing (the others are all transfer programs, like Social Security, Medicare, etc.). Among the more than 30 U.S. industries and sectors I follow, the one that seems to have a bit more life is this one. In fact, the Aerospace Index just hit a new high in September. Overvalued long-term? Probably. But in a market starved for price appreciation, perhaps it can be found here, at least for a little while.

Natural Gas – major oil-producing nations all seem to have something going on these days. And, with Saudi Arabia’s oil production taking a big hit over the weekend, perhaps there is a rationale for the moribund natural gas price to make a long-awaited return to the bullish column. After being cut in half from its late 2018 high, there is finally life, according to the charting work I do.

Poor return/risk tradeoff

Non-U.S. Bonds – This is another way to say that the U.S. Dollar is showing little indication that it will collapse any time soon.

Long-Term U.S. Bonds – whether it is corporates, munis or Treasuries, bonds maturing 20-30 years from now have had a historic run. Perhaps that has gone too far. They started to sell off sharply last week. That is the same thing as saying long-term interest rates went up. After such a powerful move higher in prices (and lower in long-term rates) over the summer, those who used bonds to try to make a profit (and not so much for the interest they pay) had best consider whether that can continue.

Gold and Gold Stocks – this is another market segment that has enjoyed strong gains. The price of gold has gone from below 1200 to over 1500 since last September. I see potential for it to go higher, but a pullback after such a move is something to account for. Again, this is another bi-product of U.S. Dollar strength, since gold is looked at by some as alternative to the Dollar.

Naturally, any of this can change with an economic shock, a geopolitical event, or, dare I say, a single tweet from you-know-who. Still, we can only analyze what is here and now, and recognize that markets are an ongoing, sometimes plodding process. Discipline and a consistent process are what make us ready for when major decisions about our wealth must be made.

Related: What The NFL Can Teach Us About Investing

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