Both Expected Return and Risk Is High For Stocks & ETFs (IYR, SMH, XLU, SPY, XLE, EWM, GLD, EWJ)

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July 5, 2011 9:37am NASDAQ:IBB NYSE:EWM

Recommended funds. Our main recommendation this week is real estate (NYSE:IYR). Its expected return jumped last week as it gained +4.46% in 5 days on slightly higher volume. However, its risk is high and has increased slightly. Because of the high risk in IYR, some

 of your money should be in other, lower risk funds. The 20 day EMA has began trending up and provides support, currently at 59.73. There is resistance at around 62.50 from recent highs. The slow stochastics has entered overbought territory, which means that the upward momentum might slow down.

  • John Benedict (Jul 1):My rotational model for July is saying to go with $DVY, $GLD $IYR, $TLT, $LQD. Two Bonds? even with the rally? Hmm..
  • Michele Schneider (Jun 30):The ETFs I have been tracking in my daily blog $IYR $SMH $IBB $XRT-all great winners this week if you like to trade ETFs
  • @wallstCS (Jun 29): Here’s Why Pending Home Sales Skyrocketed in May #mkt #housing #stocks #building #sales $IYR $DHI $HOV $KBH $LEN $TOL
  • @Progadelic (Jun 28):real estate ETF $IYR up about 1/2% probably due to Case Shiller positive news today.

We are also recommending a moderate position in semiconductors (NYSE:SMH). Its expected return also jumped up last week as it gained +6.46%in a week on slightly higher volume. However, the volatility is very high and the risk is huge, though it is decreasing. On Friday, price rose above both the 20 day and the 100 day EMA’s, which were previously trending down, but now might start trending up. Slow stochastics is high, but not overbought yet.

  • @HedgefundPLAY (Jul 1): Some serious short covering going on [in SMH]: helping $SNDK,$MU,$INTC.
  • @traderstewie (Jun 30): Amazing move in $SMH today. Last week’s big volume engulfing candlestick set the stage for this one. Targets to $35 now.
  • Jerry Khachoyan (Jun 30) thinks that SMH is the strongest sector.

Finally, to get to a more reasonable risk level, we are recommending a small position in utilities (NYSE:XLU). Its expected return increased last week, though not by nearly as much as it has for many other funds. The risk is reasonable and slightly lower. Adjusting prices for the dividend in mid-June, XLU actually made a new high on Friday. However, Friday’s closing price of 33.88 is lower than the nominal price of 34.20 from mid-May, which could provide resistance. Price bounced off the 20 day EMA, which is now trending up. Slow stochastics has reached overbought levels, which, together with the possible resistance so close by, means that the upward momentum might slow down.

  • Steve Risner (Jul 1):Utilities a good seasonal play from July thru Sept I back tested it for 7 years $XLU only had 1 bad year — 2008. Wait for a pullback though.

As the Risk / Reward plot shows, the expected returns for several funds have jumped recently. Though IYR’s expected return is high, those for SMH and S&P 500 ETF (NYSE:SPY) are even higher. Of these three, though, IYR clearly has a lower risk. XLU’s expected return is respectable, but nothing compared to the other funds listed. But its risk is lower than even IYR’s.

Last week’s recommendations.The expected returns of the funds we recommended last week — biotech (NYSE:IBB), energy (NYSE:XLE), and pharmaceuticals (NYSE:PJP) — have increased a lot too. All three funds were up last week. For example, XLE made +7.23% in 5 days.  The main reason we are no longer recommending these funds is their very high risks. The combination of funds we are recommending this week simply has a comparable expected return at a lower risk, though, as mentioned, even that is relatively high.

New highs. Malaysia (NYSE:EWM) has made new highs again, this time breaking through the resistance at around 15.00. As with many other funds, it has a high expected return and a very risk. We are not recommending it only because the combination of funds that we are recommending has a better risk profile.

Popular. SPY has a very high expected return and a very high, though decreasing, risk. Gold (NYSE:GLD), on the other hand, has a basically zero expected return and a huge risk. Both stocks and metals have the high risk, but the expected return in stocks is very high, while it’s much lower in metals.

Stay away from.Even Japan’s (NYSE:EWJ) expected return increased over the past week, though it is still mildly negative. Price is finally above the 200 day EMA, but the 20 day EMA is not there yet. Slow stochastics is overbought and price is on the resistance line, which means that it might come down once again.

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