Five ETFs That Fail To Confirm Market Uptrend


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A rising tide lifts all boats, and most stocks climb in a bull market. But some areas of the market deserve more attention because they reflect actual demand in the economy and investor sentiment.

Here's an overview of five key ETFs that can help you gauge the market's health. Some market strategists say their underperformance of the S&P 500 this year doesn't bode well for investors.

• iPath DJ-UBS Copper ETN ( JJC ): Known as the metal with a Ph.D. in economics, Dr. Copper shows industrial demand for a key ingredient in all aspects of the global economy, from consumer gadgets to infrastructure.

It revealed the global economy had turned a corner in January 2009, when it started rebounding from its bear-market bottom. It started an uptrend ahead of the stock market, which bottomed in March 2009.

The red metal has traded almost flat this year, while the S&P 500 advanced 11.5%. JJC is trading 20% below its 52-week high, while the S&P 500 is just 2 percentage points from recovering that high.

JJC has been in a downtrend since January 2011 and trades below its 200-day moving average, which is very bearish.

"Copper prices could well rally in late 2012, as China's demand revs up again," Patricia Mohr, a commodities analyst with Scotiabank, wrote in a research report released June 26.

As the world's largest copper consumer, the People's Republic accounted for 40% of global demand in 2011.

• iSharesDow Jones Transportation Average ( IYT ): IYT holds 21 stocks, including railroads, trucking and airlines with large stakes inUnion Pacific ( UNP ),FedEx ( FDX ) andUnited Parcel Service ( UPS ) -- barometers of business health. Dow Theory contends that transportation and industrial stocks need to move together to confirm a market's trend.

UPS, the world's largest package-delivery and global supply-chain management firm, missed second-quarter estimates and cut its outlook for the second half of the year, citing the European recession, consumer pessimism and global uncertainty.

Its largest competitor, FedEx, said it was cutting costs to grow margins amid lower shipping volume and demand for its services.

IYT has barely recovered its 200-day line and has returned a mere 2.89% year to date.

• iShares Russell 2000Index (IWM): IWM tracks small caps, which grow faster but are riskier than their large and midsize peers.

They tend to lead bull markets when investor appetite for risk is strong.

Their underperformance suggests investors are risk-averse and aren't betting on growth. IWM has climbed 8.41% this year, lagging the S&P by 3.13 percentage points.

• iShares Barclays 20+Year Treasury Bond (TLT): Bonds tend to move in the opposite direction of the stock market. Investor preference for bonds now shows risk aversion and a disdain for stocks.

TLT has returned 7.45% year to date and a whopping 38.50% in the past year as interest rates dropped to record lows.

Investors have put $223.2 billion into bond funds this year as of July 25, while taking $31.4 billion out of equity funds, according to EPFR Global. Bond inflow nearly doubled from a year earlier.

• iSharesMSCI Germany Index (EWG): The fiscally responsible country suffers the ills of its eurozone debtors -- Greece, Spain and Italy.

"Unexpectedly, Moody's altered its outlook of the German economy from neutral to negative," noted Gary Gordon, president of Pacific Park Financial in Aliso Viejo, Calif. "If the fourth-largest economy in the world crumbles, then a European recession may eventually go global."

EWG has returned 8.23% year to date, but has been in a downtrend since March 2011. It trades below its 200-day moving average.

This indicates investors don't expect Germany to rebound quickly, Gordon wrote.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing ETFs
Referenced Stocks: FDX , IYT , JJC , UNP , UPS

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