Market Overview

Four Sector ETFs to Avoid Like The Plague (MXI, OIH, XLP)

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Thursday's sea of red left a wide array of sector ETFs looking significantly worse than they did just a few days ago.

Growing concerns about the intensity of a U.S. economic slowdown make matters worse, thanks to another round of troubling data points. Goldman Sachs (NYSE: GS) is not helping matters with a target of 1,285 on the S&P 500, 40 points below where the index closed Thursday.

This is the same Goldman Sachs that just 90 days ago was overtly bullish on U.S. equities - but one bank's prognostications aside, it is clear plenty of sector funds should either be shorted or avoided. The situation is all the more dreary for investors looking for long opportunities with some of the surprises found on this list.

Utilities Select Sector SPDR (NYSE: XLU) In a recent note, Goldman highlighted XLU's low correlations to other sector SPDRs. Theoretically, that should be a good thing in a down market, but XLU comes with a cautionary tale.

The past several months led investors to bid up on this "boring is beautiful" ETF, and XLU gained a lofty valuation. Ensuing carnage could be nasty at current levels, as the utilities trade is crowded. XLU looks like it topped out at its 52-week of $37.37 earlier this week. If the ETF cannot find support at $35.50, it could fall to $34, an area that the fund has not seen since April.

Consumer Staples Select Sector SPDR (NYSE: XLP) The case of the Consumer Staples Select Sector SPDR proves one thing: Boring is beautiful up to the point where boring becomes hysteria, and beauty becomes ugly. Broadly speaking, the consumer staples is neither ugly nor hysteria-ridden, but investors cannot gloss over the fact that this week alone Procter & Gamble (NYSE: PG) and Philip Morris (NYSE: PM) issued profit warnings.

Procter & Gamble and Philip Morris combine for 23 percent of XLP's weight and the warnings beg the question, "Who is next among XLP's holdings?" Procter & Gamble's loss in market cap has dropped the stock down to XLP's second-largest holding behind Coca-Cola (NYSE: KO).

Market Vectors Oil Services ETF (NYSE: OIH) Already vulnerable to earnings warnings, this oil services group is getting tarred-and-feathered by other significant problems. Last week, the U.S. natural gas rig count fell to a 13-year low.

Rising inventories and slack demand imply more oil rigs could be idled all over the world as well. Few rigs in operation means less demand for the products and services provided by OIH's constituents.

iShares S&P Global Materials Index Fund (NYSE: MXI) The iShares S&P Global Materials Index Fund will celebrate its sixth birthday in September. Despite its age and an assets under management of almost $462 million, the fund flies under the radar.

For those not familiar with MXI, this is why the fund is not a buy at the moment: BHP Billiton (NYSE: BHP), Rio Tinto (NYSE: RIO) and Vale (NYSE: VALE) combine for about 17.5 percent of MXI's weight. Unless Chinese commodities demand improves sharply in the near-term, MXI is vulnerable.

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