How do fish get caught? They trust the bait and open their mouth. How do investors get burned? They trust the market and buy into it. Obviously, for most of the time owning stocks is as important for a portfolio’s growth as eating for a fish’s survival.
However, there is a time to be cautious. When the waters are infested with fisherman and bait, it’s better for the fish to go hungry for a while. Even though not every potential meal is bait, keeping its mouth shut will ensure not getting caught.
Courtesy of the recent rally, investors who didn’t bail on stocks earlier this year enjoyed a feast of profits. After predicting a bottom below Dow 6,700 earlier in 2009, the ETF Profit Strategy Newsletter foretold this massive rally from the March lows via the March 2nd Trend Change Alert. At the time, Dow 9,000 – 10,000 was given as a target.
With the Dow eclipsing its target for a market top, odds that today’s bargain may turn into tomorrow’s money pit have increased exponentially.
ETFs tied to high octane sectors such as financials, real estate, technology and materials are likely to fall harder and faster than the overall market once reality catches up with this overvalued market. ETFs warranting a short leash include the Financial Select Sector SPDRs (XLF), iShares Dow Jones US Real Estate (IYR), the Nasdaq QQQ (QQQQ) and other technology related ETFs, and the Materials Select Sector SPRDs (XLB).