4 Vulnerable ETFs to Avoid (EWN, XRT, OIH)
Exasperated traders and investors are probably quite happy May 2012 has drawn to a close. The S&P 500 lost over 6%, good for its worst monthly performance since September 2011. The Dow Jones Industrial Average also lost more than 6% and the Nasdaq was off over 7%, marking the worst monthly runs for those indexes in two years.
On the back of another disappointing monthly jobs report, June looks like it could follow in May's footsteps or be even worse. In the past two days, the spate of critical U.S. economic data points investors have absorbed reiterates the notion that the economic recovery here is sluggish and fragile at best.
Slack GDP and employment figures also underscore the fact that even though plenty of global and sector ETFs have already been shellacked, there is still downside to be endured. That is to say avoid or short the following quintet.
SPDR S&P Retail (NYSE: XRT) There are still some compelling individual stories in the retail space and in XRT's defense, its top two holdings are Expedia (Nasdaq: EXPE) and Trip Advisor (Nasdaq: TRIP), two of the best-performing stocks in May. Despite the fact that the ETF is down 8% in the past month, investors have been seen pouring new cash into the fund.
On a technical basis, XRT has already retraced a significant portion of its move to its 2012 high around $63 from its October 2011 low around $43, but this ETF will be in trouble if support fails at $56. Regarding fundamentals, XRT's exposure to discount retailers such as Wal-Mart (NYSE: WMT) and Dollar General (NYSE: DG) may keep the fund from being less bad in this environment, but the recent economic data points indicate betting on retail ETFs right now could prove hazardous to a portfolio's health.
Market Vectors Oil Services ETF (NYSE: OIH) NYMEX-traded oil futures dropped 17% last month and are careening lower again today thanks to the weak jobs number. Earlier this week, the Energy Information Administration first-quarter demand in the U.S. was at a 15-year low. Inventories here are at a 22-year high. Simply put, oil demand is not where it should be at this point in an alleged economic recovery and with Chinese data points offering no reason to smile, it's easy to see why oil prices are plunging.
That's problematic for oil services stocks and ETFs such as OIH and the iShares Dow Jones US Oil Equipment Index Fund (NYSE: IEZ) because oil services are often more intimately correlated to oil futures than integrated names are. OIH has lost 14.5% in the past month and if oil falls below $75 per barrel, another 8%-10% could come off this fund.
SPDR S&P Homebuilders ETF (NYSE: XHB) XHB and the rival iShares Dow Jones US Home Construction ETF (NYSE: ITB) had been two of the more pleasant surprises among sector ETFs this year, but both have been taken to the woodshed today and it looks like sellers are concentrating more on XHB because volume is above the daily average with two hours left in the trading day.
The problem with XHB isn't just its home builders exposures, it's allocations to the discretionary retail side of residential real estate through stocks such as Williams-Sonoma (NYSE: WSM) and Pier One (NYSE: PIR), which could be vulnerable if the recovery continues to lose steam. XHB could drop another 10% if it closes below $20 today.
iShares MSCI Netherlands Investable Market Index Fund (NYSE: EWN) It's probably not a surprise that the Global X FTSE Greece 20 ETF (NYSE: GREK) was the worst-performing traditional long ETF last month and as we predicted would happen the yield on the iShares MSCI Spain Index Fund (NYSE: EWP) has expanded significantly.
Not to mention, everyone and his sister knows the iShares MSCI France Index Fund (NYSE: EWQ) and the iShares MSCI Italy Index Fund (NYSE: EWI) are a mess. But the Netherlands isn't being ignored. Stained with the Euro Zone label, EWN has lost 13% in the past month and is now trading at levels not seen since the fourth quarter of 2011.
EWN is almost 36% allocated to consumer staples names, so this fund should be working right now. It's not and it's vulnerable to a scenario when traders get tired of beating up on EWP, EWI and EWQ, and go hunting for their next victim. EWN is a prime candidate.
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