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- Wall Street often overshoots, so investors should know these ETFs to avoid.
- ProShares UltraShort 20+ Year Treasury (TBT): The Fed’s hawkish rhetoric is not permanent.
- Energy Select Sector SPDR Fund (XLE): The theme is long in the tooth.
- Financial Select Sector SPDR Fund (XLF): Could be collateral damage in the war on inflation.
Today’s picks of ETFs to avoid is likely going to upset a few readers. Just know that this is a price action thing, not an emotional list. The current state of the equity market is in shambles because of outside factors. The Federal Reserve’s hawkish rhetoric and the war in the Ukraine are the prime reasons for fear. Even Bitcoin is crashing.
However, the price action in all sectors is coming along proper chart technical paths. Nothing has yet gone rogue from that perspective. Eventually this too shall pass, and investors should be doing homework now. Part of it is finding potential pitfalls like in these ETFs to avoid. Those opinions may turn out to be nothing, but it doesn’t hurt to be overly cautious.
A basic premise I have is to seek the lowest hanging fruit. So if I can avoid easy potential mistakes, I hop to it. We have opportunities in so many great company stocks. Therefore I can easily resist the temptations of chasing current hot ETF themes. This is a mere cautionary note to not blindly buy into these popular talking points.
TickerETFPriceTBTUltra Short 20 Yr Treasury$26.63XLEEnergy Select$83.99XLFFinancial Select$33.92ETFs to Avoid: ProShares UltraShort 20+ Year Treasury (TBT)
Source: Charts by TradingViewCentral banks had been in quantitative easing (QE) programs for years. They ratcheted those after the pandemic lockdowns. Now the Fed has deployed its counter measures with a harsh quantitative tightening (QT) stint. The news of it a few weeks ago launched a sharp rally in bond yields. The ProShares UltraShort 20+ Year Treasury (NYSEARCA:TBT) was the beneficiary of that trend. Conversely, the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) corrected hard on the news.
The chart technicals suggest that the TBT stock may have run its course. At least the easy part of the rally has already transpired. From here the upside should be much more difficult. The Fed hawkish rhetoric will soon go stale. These are turbulent tickers, so if it can’t rally then the drop is more likely the next direction. Chasing rallies too late is often the pitfall of most retail investors. This earns the TBT its spot on my list of ETFs to avoid for the next few months.
Energy Select Sector SPDR Fund (XLE)
Source: Charts by TradingViewWhen it comes to a hot topic, oil prices is a prime example from Main Street to Wall Street. The recent surge made it a problem for all Americans. I currently pay over $7 per gallon in California and it could rise further. But I bet that there is a limit where the politicians would have to step in. So far they’ve talked about fixing the problem, but they haven’t seriously intervened.
The price of oil has limits especially when supply can change at the drop of a hat. This is a rigged market — pun intended — so logic need not apply. The Energy Select Sector SPDR Fund (NYSEARCA:XLE) is my highest concern on this list of ETFs to avoid. Chevron (NYSE:CVX) and Exxon (NYSE:XOM) comprise 44% of the whole thing. I am always leery of an ETF that is so heavily dependent on just two stocks.
Chevron and Exxon are great companies and I’ve written about buying them on the cheap. But up at these levels the downside risks may easily outweigh the upside potential. I would avoid shorting them or the XLE, but it would be prudent to seek fallen angel stocks instead.
ETFs to Avoid: Financial Select Sector SPDR Fund (XLF)
Source: Charts by TradingViewEver since the 2008 global financial disaster, bank stocks have turned their metrics around. Banks are now fortresses at least until we discover a new way to break the world. The companies in the Financial Select Sector SPDR Fund (NYSEARCA:XLF) all are on solid footing. My issue with the ETF that represents them is merely cautionary. I fear it could be collateral damage in the war on inflation.
The Fed spent years pumping banks with extra freebies to reflate the economy. Now they are intent on poisoning the heck out of it. This means that the banks could be squarely in its evil sights. For that, I place the XLF on my list of ETFs to avoid for at least 10 months.
Companies in it are great, starting with Berkshire Hathaway (NYSE:BRK.B) and JPMorgan (NYSE:JPM). Clearly these are pristine management teams that rarely are cause for concern. Even though enough steam has come out of the XLF, there is more technical weakness in the chart.
On the date of publication, Nic Chajine did not have (either directly or indirectly) positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
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