Rally ETFs: Panic Selling Will Open Door

Panic-stricken investors often make a mad dash to acquire cash, selling securities at any price. They sell everything to get back something... anything! They just want out.

Perhaps it is unfortunate, then, that we haven't quite seen the levels of hysteria that are consistent with a so-called "bottom" in the stock market. Sadly, we may need "panic selling" to occur before we can get out of these bearish woods.

For example, in January and again in March, the CBOE Volatility Index [VIX] spiked above 30. Shortly thereafter, stocks rallied significantly and served up a number of lower-risk buying opportunities.

Today, even though volatility via the VIX is on the rise, we're still below the irrationally fearful levels that occurred in January or March. The VIX closed at 25.78 Monday afternoon. (Review my "take" on the VIX as a predictor here.)

Indeed, an eerily similar phenomenon occurred with the Put/Call Ratio. In January and again in March, after the Put/Call Ratio hit 1.0, stocks came back into favor. Yesterday afternoon, we hit .89, a bit shy of the magic number. (You can read more about how "puts" and "calls" identify buying opportunities in my column, "Extreme Bearishness.")

Granted, stocks have now gone on to hit "lower lows." And some might argue that so-called buying opportunities were nothing more than mistakes. But that's not true!

If you had acquired positions in mid-January and again in mid-March, you effectively purchased near the lows. Your newest positions are at a significant discount to October 2007 stock prices. And you weren't making the egregious error of "going all in" when it seemed safer to do so in May.

It follows that, a smarter investor is watching the CBOE Volatility Index. The more balanced investor is keeping an eye on the Put/Call Ratio. And when "irrational fear" gauges hit excessively pessimistic levels once more, the disciplined investor will look to purchase.

What should you buy? I would consider adding to positions with familiar themes, including Goldman Sachs Resources (IGE), clean-n-green technologies via the Powershares CleanTech Portfolio (PZD) and Global Materials (MXI).

There's no doubt that I'd love to wade into the financial ETF waters; however, you'd have to stick with individual companies at this juncture -- companies like J.P. Morgan Chase (JPM) or Goldman Sachs (GS). The after-shocks of the credit malaise is still too palpable.

And as much as I might wish to gravitate towards technology, oil uncertainty is holding back the next expansion; that is, tech and financials will be the leaders at the start of a new economic style, yet we're still stuck in the old one.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[carey_jim]

That argument doesn't always work.

There was a panic selling of tulips which finally broke the back of the tulip craze but tulips never came back.

And it wasn't until about 1956 that the value of the DOW surpassed it's 1929 level.

Many civilizations have risen in the past only to collapse within a generation. America is not exempt from that process.

The recent rapid transformation of the Soviet Union into a collection of third world countries and the relatively recent rapid collapse of European civilization into two civil wars should teach us that cultures and civilizations are mortal.

Just ask any British person of a certain age and education how fast Britain was transformed into a minor player on the world stage after being the most powerful empire the world had ever seen.

We are not exempt from economic and social collapse, and magic formulas will not ward off disaster, only vigilance, intelligence and great energy can possibly do that.

[User 26737]

Gosh ........ sounds like we need that panic selling ..... recession .......
depression! The writer is an idiot!

[Smart ETF]

Jim, sounds like good ole Kondradiff cycle theory; too bad more investors dont study market history and inflation cycles.

I disagree with the second post, one has to accept the time frame of the writer. If he is a trader then he is looking for short-term entry/exit points in which the VIX and Put/Call ratio are valid tools; it's simply a matter of different strokes for different folks. I don't use those tools, but then again, I have a my own strategy using a variable time-frame.