5 Great ETFs to Buy Right Now

Posted on Tue 4th Aug, 2009 02:30:22 PM

Over the past three weeks in my weekly newsletter EPIC Insights, I have highlighted how bullish market sentiment has become. Each week, a broad array of indices pushes to new highs in a well-defined, synchronized manner. During the rally, I have remained cautious, as chasing runaway markets often leads to frustration. When the Dow Jones Industrial Average (Dow) increased 11.6% in two weeks, I was anxious to see how prices would move. With the market overbought, digestion of the gains was needed. Would we see a continued rally or a quick correction of the sharp rally?

What has transpired over the past week is extremely bullish. When a market is overbought, there are two possible outcomes. The most common is a decline that eliminates a portion of the recent rally. The other, more bullish, outcome is sideways movement that digests a portion of the gain before the rally resumes. Abby Joseph Cohen often describes a great bull market as a staircase. First the market rallies, then it moves in a consolidating range, and finally it pushes higher again. With European markets having joined the move, the rally has synchronized and is displaying the powerful staircase pattern.

Looking at the charts of three different indices below—London’s FTSE 100, Brazil’s Bovespa, and the Dow Jones Industrial Average—we see a familiar story: sharp rallies higher (solid black line) give way to a horizontal trading range (green dotted lines) that consolidates the sharp gains. Once the consolidation period is over, prices move higher again. This classic staircase pattern combined with the series of synchronized highs witnessed this past week illustrates that the market is technically strong and will continue to push higher. Although I remain concerned about the long-term direction of prices and convinced that we will be marred in a trading range market for the next decade, the short-term trend is clearly higher.

Dow Staircase Click to Enlarge

Bovespa Staircase Click to Enlarge

FTSE Staircase Click to Enlarge

We have been waiting patiently for the right moment to enter the market and I believe we have reached it. Our portfolio has a very low equity exposure which can be remedied by purchasing a variety of ETFs. To benefit from further global increases, I recommend the following five ETFs: iShares EAFE (EFA), iShares Global 100 (IOO), Powershares QQQ Trust (QQQQ), iShares MSCI Australia (EWA), and iShares MSCI Brazil (EWZ). In order to keep market specific risk low while enjoying the rally, I recommend a 2% portfolio position in each of the following ETFs: EFA, IOO, QQQQ, EWA, and EWZ.

Sean Hannon, CFA, CFP is a professional fund manager. He runs EPIC Insights Weekly, the free Sunday newsletter, and also is the founder of EPIC Advisors, LLC. View Sean’s Full Bio.

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