ETF Playbook - Thursday: March 22, 2012

Short-term, the risk remains high given the myriad of overbought conditions and negative technical divergences present . And given this risk, the probabilities still favor a correction of -5% to -10%; with an intermediate-term top at least months off into the future. We are more apt to consider buying a decline.

OBSERVATIONS:

1. Natural Gas (UNG) - forged a key reversal higher from lower trendline support; which puts the risk towards higher prices.

2. Lehman 20+yr Bond Fund (TLT) - prices are now below the 200-dma support level; but have held at previous high support. The question is whether this is an intermediate-term top as in late 2008-to-early 2009; of whether this is a just a correction as seen into the October- 2011 bottom. On the weekly chart, the bullish double bottom breakout target of $133 remains in force.

3. Country ETFs - note that prices in many are below their ultra long-term moving averages, which in many cases is between 300-days and 400-days. The potential exists that prices are in the process consolidating in lieu of a larger rally higher; the context of any decline will provide additional information.

These relative data points are worrisome, and warrant our current “cautious” bias:

1. Risk-on relative ratios haven’t strengthened during the recent rally:
Russell 2000/ S&P 500 (IWM/SPY)
S&P Industrials (XLI/SPY)
S&P Materials (XLB/SPY)
Steel/S&P 500 (SLX/SPY)
Copper/S&P 500 (JJC/SPY)

2. Rises in this ratio would suggest a large headwind to economic growth: Crude Oil/ S&P 500 (USO/SPY)

POTENTIAL LONG TRADES -
√ Oil Service (OIH) - prices are just below the 200-dema/40-dema cross, with OIH lagging the S&P rather badly. At some point, it shall begin

POTENTIAL SHORT TRADES -
√ None at this time.

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