McCall’s Call: Staying Put In A Pullback

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Most loyal readers of my column know I've been positive on the global stock market for a few years. So far, that view has worked, as the S&P 500 is up over 90 percent from the March 2009 low.

Matt McCall Column However, a recent five-week losing streak for the index makes it worth looking more closely at my bullish outlook for stocks. I'll discuss my current outlook on the market and whether investors should continue to stay the course or shift to the bearish camp.

One of the most difficult times for long-term investors is a market sell-off in which they watch their portfolio values fall from multiyear highs. It doesn't matter who you are, and it becomes harder to stay the course when the values continue to drop.

Unfortunately in the stock market, and everything else in life, sometimes you have to take a beating before you hit a new high note. Until you realize taking a beating is a normal part of long-term investing, you'll hurt the overall performance of your portfolio.

Current Valuation

One of the reasons I continue to suggest investors stay the course with exposure to equities via stocks and ETFs is the valuation of the U.S. market. The general estimate for 2011 S&P 500 earnings is approximately $96.

Based on a historical average P/E ratio of 15, this puts the index at 1440, or 12 percent higher than Monday's closing price. What's even more promising is that estimates for 2012 jump to the ballpark of $107.

Based on such valuations, the market is, at a minimum, a hold.

Historically, when the temperature begins to rise, the stock market often falls. Last year, the market hit a top in April and continued to fall through July before buyers jumped in. Over the next 10 months, the S&P 500 rallied 35 percent.

I'm not saying the exact same pattern is forming this year, but I do believe there could be more potholes ahead for stocks before buyers grasp that there are bargains to be had, and begin to buy in earnest.

The important support zone for the S&P 500 is 1227 to 1250. The top end of the range is less than 3 percent from Monday's close.

That suggests now is not the time to sell stocks. Rather, now's the time to begin fine-tuning your buy list.

The Buy List

There are a few ways to go about building a buy list for when the market is flashing the green light. One would be to take the conservative approach by investing in the entire market via one or two ETFs.

A great example would be the Vanguard Total Stock Market ETF (NYSEArca:VTI), which invests in more than 3,000 stocks that represent the whole of the U.S. market. The extremely low expense ratio of 0.07 percent makes this ETF very attractive for the buy-and-hold crowd.

There's nothing inherently wrong with the conservative approach to investing, but I think some investors can take a little more risk for the potential of much higher reward. A few of the ETFs I would be targeting when the buying begins are below.

IQ Global Resources ETF (NYSEArca:GRES) tracks an index that uses both momentum and value to identify global companies that operate commodity-specific sectors such as energy, metals, grains, etc. There are a total of 148 stocks in the ETF, which rebalances every month.

Going back to October 2007, GRES has easily beaten the Dow Jones-UBS Commodity Index in performance. Its expense ratio is 0.79 percent.

Another good example for those interested in a bit more risk is the Emerging Global Shares Emerging Markets Consumer ETF (NYSEArca:ECON). It's composed of 30 leading emerging market stocks in the consumer goods or services industries. The top five countries represented include Mexico, Brazil, South Africa, India and Chile.

The thesis behind buying ECON is that the economies within the emerging markets will continue to outpace that of domestic countries, and the exposure to the financial crisis that has affected the developing world is minimal. The expense ratio is 0.85 percent.

Vanguard Small Cap ETF (NYSEArca:VB) is a low-cost investment option that covers the entire small-cap asset class with over 1,700 stocks in the allocation. The expense ratio is 0.17 percent. The fact that the top 10 holdings make up only 3 percent of net assets speaks to the true diversification the ETF gives investors throughout the small-cap arena.

Patience

Sometimes I read an article and it excites so much I want to run out and buy the ETF or stock mentioned.

But this isn't one of those articles.

Instead, I suggest you wait for the S&P 500 to hit the buy zone I highlighted, and then at that time, you can pull out your list of favorite ETFs and start doing a bit of buying.

Matthew D. McCall is editor of The ETF Bulletin and president of Penn Financial Group LLC, a New York-based wealth management firm specializing in investment strategies using ETFs.


Don't forget to check IndexUniverse.com's ETF Data section.

Copyright ® 2011 Index Publications LLC . All Rights Reserved.



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



This article appears in: Investing , ETFs

Referenced Stocks: ECON , GRES , VTI

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