Weekly ETF Pick with Market Meter

Pan: SPDR KBW Bank ETF (KBE) Research: KBE is linked to the performance and yield of the KBW Bank Index which consists of 26 large U.S. banking stocks. Top holdings include the usual suspects like Bank of America (8.70%), JP Morgan (7.82%) and taxpayer owned misfit Citigroup (7.57%). The FDIC reported the banking industry lost $3.7 billion during the second quarter on bad loans made to homebuilders, commercial real estate developers and struggling businesses. Meanwhile, banks are embroiled in a political and public relations mess because of their insistence on paying exorbitant sums to incompetent executives, many of whom are guilty of gross financial negligence. The first phase of the banking crisis began with the collapse of the U.S. housing market. And the next phase of the crisis has already begun to take root; the commercial real estate bust. More financial nonsense and greater financial regulation are sure to come. And none of it will be good. No amount of government intervention or earnings manipulation will be able to stop another reckoning day for this disease stricken sector. Opinion: As banking goes (and by extension financials) so goes the market. The banking sector, represented by the SPDR KBW Bank ETF (KBE), was the first to bottom and rally in March. It is no surprise that KBE topped several months before the broad market indexes in 2007. Now again, KBE is leading the way lower. Since its October 14th recovery high of $24.44, KBE has fallen 15.38%, compared to 4.65% for the S&P 500 and 2.87% for the DJIA. Major market tops often see the very sectors that provided leadership earlier, peel away from the major indexes and head south sooner and faster. KBE's magnified decline since October 14th corresponds well to its inflated 168% rally from the March 6th lows. While KBE might spike a little higher over the next several days, it appears that KBE has peaked and started a painful journey that will see prices fall significantly below its March 6th low of $9.12. There is no short ETFs linked specifically to the banking sector. Shorting KBE or buying put options is the only way to profit directly from a decline in banking stocks. Financial short ETFs (FAZ and SKF) provide an indirect way to profit from falling banking/financial shares. Snapshot: KBE Specs Expense Ratio: 0.35% Volume: 6,201,910 Inception: 11-08-2007 Net Assets: $968.90 million 1-Year Range $9.31 - $30.66 Benchmark: KBW Bank Index KBE 12-month chart Prior ETF Pick Review: GLL: Gold has been the story of the week. India announced it will buy 200 metric tons or $6.7 billion worth of gold. Goldbugs got excited and gold rallied to new highs, just shy of $1,100/oz. In the 10-13-09 Pick we mentioned that GLL below $10.50 would be a good buy. The 10-22-09 Pick mentioned that: "GLL may drop below $11. Our 6-12 month target for GLL is around $15/share if the fund is able to deliver the 2x inverse performance." Today (11-4-09) GLL closed right in the middle at $10.66. It seems like a top for gold and a bottom for GLL is imminent. GLL below $11 would be a great opportunity to initiate a position or increase on a current position to lower the overall cost basis. We expressed via the last few Pick Reviews that silver and gold were either near or at a market top while the U.S. dollar was either near or at a market bottom. Based on the sharp sell-off in silver and gold prices, and sharp rally in the U.S. Dollar index, it appears as if silver and gold have topped while the dollar has bottomed. Eventually prices should come below $8/oz for silver and below $700/oz for gold while the U.S. Dollar Index should come close to par with the Euro. ZSL: While gold pushed to new highs, silver prices remained behind and is still 4.55% below it's October high. Silver failed to touch the upper end of the trend-channel created by the rally from the October lows. Even though it looked like silver's fate towards the down-side had been sealed, perhaps silver will attempt to spike to $18.5/oz to take care of this unfinished business. This would provide an opportunity to double up on ZSL at around $4.30/share with a 10% stop-loss protection. Short ETFs: The market seems to be in the early stages of a major decline. Aggressive investors may buy short ETFs at current prices. Cautious investors may want to wait until the S&P closes below 1,040 (9,500 for the Dow). Cash: Cash continues to be the preferred choice for investors who don't trust the market at this time. Page 5 of the August newsletter highlights the benefits of cash. Market Meter: Up-down, up-down and up-down was the exact route the market took since last week's ETF Pick. S&P 1,040 was broken several times, albeit not convincingly. Today's (11-4-09) close was within four S&P points of last Wednesday's (10-28-09) close. Many indicators - some of which are discussed in last week's ETF Pick - are in favor of October 19th marking the end of the rally from the March lows. A interesting Fibonacci correlation can be found between the market top on September 3rd 1929 and October 19th 2009. October 20th occurred exactly 4181 weeks after the 1929 top. 4181 is the 20th Fibonacci number (0, 1, 1 2 , 3, 5, 8, 13, 21 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181). Even though the correlation between gold, silver, the U.S. dollar and equities has become a bit messy, thanks to gold's spike, our focus has changed from trying to pick a market top to profiting on the next leg down. Aggressive investors may use current prices and any further rallies, if we get them, to add short ETFs. Cautious investors may add short ETFs once the S&P breaks and stays below 1,040. Both aggressive and conservative investors should use sell-stops to protect against the outside chance that stocks may rally to new highs beyond S&P 1,100.

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