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Jan. 22, 2022, 9:03 a.m. EST

As stock-market turbulence revs up, this ETF theme has drawn 32% of flows in 2022 so far: ‘This isn’t a flash in the pan’

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By Mark DeCambre

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An ETF traders field guide

How do you play this wacky market?

We chatted with Frank Cappelleri, executive director and technical analyst at Instinet and he offered a few insights on the carnage he’s seen as well as the potential opportunities.

Cappelleri said buy-the-dip traders may be losing confidence with this recent bout of volatility. He said that the fact that we haven’t gotten to so-called oversold conditions yet makes him cautious about wading into the market with both feet.

The S&P 500 hasn’t been officially oversold, based on momentum measures such as the relative strength index, “since 3/12/20–a run of 468 straight days—one of the longest streaks in recent history,” Cappelleri said.

The market is still looking for an oversold reading, which might signal a healthy flush out, or capitulation by the bulls, which might merit an entry point into an increasingly choppy market. A downturn that signals a washout or a rally that must be chased by fund managers could be one indicator that it is time to get in, he noted. But it’s only one factor.

“The way I look at it, you never know which one of these bounces is going to be meaningful,” Cappelleri said.

The Instinet exec said that speculative investments such as the Cathie Wood’s ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK +2.11% and the SPDR S&P Biotech ETF /zigman2/quotes/205950134/composite XBI +1.53% were “breaking down.”

He also said that semiconductor funds, which represent the heart of the technology sector’s outlook for growth, have been hammered.

The VanEck Semiconductor ETF /zigman2/quotes/200571902/composite SMH -4.46% is down 6.8% in the year to date and iShares Semiconductor ETF /zigman2/quotes/209255350/composite SOXX -4.26% is off 7.6%.

“SMH or SOXX look similar [and has] really been having a lot of back and forth and now potentially breaking down from a two-month topping formation,” Cappelleri said, referring to the ticker symbols for the funds.

So, what should investors being thinking about as the market whipsaws?

Cappelleri said look for assets and funds to produce lower lows and higher highs to help determine whether an uptrend or a downtrend is in effect. He said knowing the difference between an uptrend and a downtrend is crucial because you want to sell rallies in a downtrend and buy the dip in an uptrend. (As an aside, long-term investors shouldn’t make a practice trying to time the market)

There are some areas where uptrends are in force, based on Cappelleri’s metrics. Materials Select Sector SPDR Fund /zigman2/quotes/204467551/composite XLB -0.41% , which replicates the S&P 500’s materials sector and Industrial Select Sector SPDR Fund /zigman2/quotes/202026558/composite XLI -0.30% , which tracks industrials, aren’t far from their highs and could be worth dip buying.

Cyclical sectors such as the energy /zigman2/quotes/210600521/delayed XX:SP500.10 -0.62% /zigman2/quotes/206420077/composite XLE -0.24% and financials /zigman2/quotes/210600060/delayed XX:SP400.40 -0.18% /zigman2/quotes/209660484/composite XLF +0.16% also have been hot so far this year, while communication services /zigman2/quotes/210600403/delayed XX:SP500.50 -0.86% /zigman2/quotes/204079482/composite XLC -0.39% were seen trying to stabilize, Cappelleri said.

…and one more thing

Bloomberg’s Balchunas says that individual investors are showing signs of their commitment to this market, which may serve as a bullish indicator for some market watchers. He said that retail investors were seeing an opportunity for cheap beta and taking it. He said retail was showing “diamond hands” times 10, an expression often used in social-media platforms to refer to an investor who isn’t inclined to sell and is holding a good investment for the long term.

That said, Balchunas sees cash-like investments also growing in popularity as Treasury yields, such as the 10-year /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -2.84% and 2-year Treasurys /zigman2/quotes/211347045/realtime BX:TMUBMUSD02Y -3.87% , rise and as market turbulence persists. The iShares Short Treasury Bond ETF /zigman2/quotes/204686525/composite SHV +0.0068% , which tracks a market-weighted basket of short-term securities, is one area that he pointed to as having typically drawn flows among investors who turn to cash. The ETF manages over $13 billion and carries a 0.15% expense ratio, translating to an annual expense of $1.50 for every $1,000 invested. He also called out the slightly longer-term iShares 1-3 year Treasury Bond ETF /zigman2/quotes/204549300/composite SHY +0.26% , which carries the same expense ratio and manages $21 billion.

Popular ETF reads

—That’s a Wrap

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