ETF Talk: Sectors Suffer Along with the Market

Anyone who has invested in the stock market so far this year is probably feeling wounded from the losses. Investors following my Successful Investing advisory service have been guided to areas of relative safety, but still, our allocations haven’t been immune to the ill effects of the overall market plunge.

Before I start reviewing performance numbers, remember to write me a note online if you have any questions about ETFs that you’d like me to answer in an upcoming ETF Talk feature. To do so, please click here. Year-to-date through July 22, the performance of our ETF-focused portfolio is -4.93%. If this doesn’t sound good to you, consider the rest of the market’s horrid results. You see, compared to the major market indices, our performance is stellar.

So far in 2008, the S&P 500 is down 13.03%! On a relative basis, we’ve beaten the S&P 500 by almost three times, or by nearly 300%. Our ETF-oriented portfolio, combined with strategic cash allocations, also outperformed by far the year-to-date collapse of the Dow, -12.53%, and the NASDAQ Composite, -13.13%.

The table below clearly shows the pain of deep losses in the major market averages so far this year. So, if you thought the problems in this market were relegated to just the major averages, you’re wrong.

The reality is that all of the key market sectors are in the red so far through 2008. This shows just how widespread the decline has been. Consumer discretionary stocks, industrials, technology, and healthcare all are showing double-digit percentage losses for the year. Even the energy sector is down for the year, despite record-high oil prices, with the Energy Select Sector SPDR (XLE) dipping 3.50% through July 22. The worst-performing sector is financials, Financial Select Sector SPDR (XLF), with those stocks giving up 22.26% of their value through July 22 this year.

Clearly, this year is one in which the buy-and-hold investment strategy so common with most advisory services is proving to be disastrous. What I find even worse is that some advisors are telling their clients to add more and more to their portfolios. Many of these advisors have bought stocks in anticipation of a rally somewhere down the road.

Unfortunately, many investors are down so much in 2008 that even a sharp rise in stocks from here won’t begin to make a dent in their severe market losses. At this point, I want to go on record saying that I think we are due for a sharp snapback rally sometime during the next couple of months — or even the next couple of weeks. Equity markets just don’t go straight down. And given the immense decline we’ve witnessed since May, I expect to see buyers step back into this market and — at least temporarily — create a little buying fever.

But the overall trend remains downward, with the S&P 500 (SPX) and the EAFE Index (EFA) both plunging well below their 50- and 200-day moving averages. Both the S&P 500 and the EAFE Index — a key measure of the international markets — are trading at multi-year lows. This year’s performance contrasts with research that shows if you bought and held the stocks in the S&P 500 from January 1, 1990, to December 31, 2007, you would have achieved an annualized return of 10.85% for those 17 years. And while the latter performance indicator is true, it suggests falsely that the buy-and-hold strategy is the soundest way to invest right now. The challenge is to know when to go back into the market and when to direct your money into the safety of cash.

Now if you are already acquainted with my Successful Investing service, you know that we have a proven plan to put you in the market when stocks are trending higher, and to take you out of the market when stocks are in decline. The plan has been tried and tested during the past three decades, and it has kept investors away from the most pernicious drops during that time period. Our plan also has put us into stocks during many of the market’s biggest bull runs.

I like to use ETFs for investing in equities, but caution needs to be exercised when the overall trend for the market and key sectors is downward. When you let the "moving averages"of the market and key sectors determine your investing decisions, you go from having no plan about when to buy and sell to having a proven strategy that’s served investors well for more than three decades.

To find out more about Successful Investing, click here.