Some ETF’s Risk Has Gone Into Unacceptable Territory (SMH, IYR, XLU, LQD, GLD, EWJ)
Alex Strashny: While some ETF’s have made good money last week, increasing their expected returns, their risks have gone into unacceptable territory.
Recommended funds. I wrote last week that, while the expected returns of some funds were high, the risks were high as well. Over the past week, the risks have increased so much, that I cannot recommend any of the ETF’s that I currently follow. Instead, my recommendation is to go into cash or a good money market fund, even in our Balanced allocation.
Last week’s recommendation. Our main recommendation last week was real estate (NYSE:IYR). It did go up +3.98%in a week, increasing its expected return even more. However, the volume was slightly lower and the risk has gone up a lot. Slow stochastics is very overbought, at the same levels that it was during the peak at the end of April. RSI is close to being overbought, but not there yet.
- @chewtonic (Jul 8):Re-shorted $IYR just now, could be island top..plus no jobs, high gas, slowing retail sales & at major resistance
We also recommended a moderate position in semiconductors (NYSE:SMH). SMH made +1.67%during the week, about as much as the overall market. The relative lack of movement decreased SMH’s expected return, though it is still very high. Its risk, however, has not decreased, and remains as huge as it was last week. We were able to recommend SMH last week in combination with other funds. But since their risk has increased, we can no longer recommend SMH either. Slow stochastics is overbought. 20 day EMA is flat and price appears to be falling back into it.
- Michele Schneider (Jul 10): SMH could not confirm into a bullish phase…
- Mosse Rodbay (Jul 6) thought that SMH was weak.
I also recommended a small position in utilities (NYSE:XLU). Its risk a week ago was lower than it was for other funds, but not low in an absolute sense. XLU made only +0.84%over the past week. While its expected return increased slightly, its risk jumped to unacceptable levels. XLU’s moving averages are trending up, but, as with other funds, the slow stochastics is overbought.
As the Risk / Reward Plot shows, though some funds, such as IYR, have very high expected returns, the risks are also very high. Of the funds that we follow, there is no longer a fund with a reasonable risk.
Low(er) risk.The risk of corporate bonds (NYSE:LQD) is also unacceptable, though it is lower than the risk of many other funds. LQD rose +0.85% last week — its expected return is mildly positive and rising. While the risk is still unacceptable, at least it is decreasing. The volume is higher. Even though, as with many other funds, the price moved higher over the last few days, neither RSI nor slow stochastics are overbought.
Popular. SPY’s high risk has increased some more. Its expected return, though clearly positive, has decreased. Gold (NYSE:GLD) rose +2.91% last week, increasing its expected return a lot. While the risk has decreased somewhat, it is still very very high.
Stay away from.The expected return for Japan (NYSE:EWJ) remains mildly negative, though it’s become slightly better. The 20 day EMA has crossed below the 100 day EMA. Slow stochastics is very overbought.
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Written By Alex Strashny From Peaceful Gains Disclosure: No Positions