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5 ETFs With Great Potential

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Jim Farrish of Money Strategies shares his views on the global markets, and reviews a few sectors for favorite ETFs.

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Nancy Zambell: My guest today is Jim Farrish of Money Strategies, and he's going to talk to us a little bit about one of his columns, "Jim's Notes." He has a far-reaching view of what happens in the market, as well as individual stocks, funds, and ETFs.

So Jim, in your recent "Jim's Notes," you talk about investor sentiment, and what may or may not be an overbought market. Can you explain that a little bit?

Jim Farrish: I think one of the challenges we all face today is we spend more time on technical analysis than historically. But that sentiment really does come from technical analysis as much as from the options market, as to what people think are overbought or oversold markets.

The old adage that a market can be irrational a lot longer than you can remain solvent is one rule we all need to apply there. So our focus is that it's overbought when it starts to correct, and until then you just kind of stick to your knitting, put your stops in place, and understand your time frames, whether that's short-, intermediate- or long-term.

So don't buy into the media or the hype of it being overbought; let the market tell you when it's done. The old adage of Teddy Roosevelt was that when the horse dies, dismount. It'll tell you when it's over.

Nancy Zambell: That's a good adage! Now let's talk a bit about Europe and what's happening over there with the PIIGS countries. It's been affecting our stock market for quite some time, and then it seemed like nobody really cared about Europe, and now it's back in the news again. Do you have a short-term view of what we can expect from Europe?

Jim Farrish: I think that you're seeing a pullback in Europe. But I think what you're going to see is that it's not going to rival what we saw in 2010 or 2011, which were the scares of those nations defaulting on their sovereign debt. The ECB has stepped behind them now to bail them out much like the US did.

So I think the European debt crisis is there, but it's going to be a volatility issue more than a risk issue. I think you're going to see volatility as the news heightens, but I think that creates buying opportunities. We've definitely seen about a 4% to 5% pullback in Europe, and I think that does create opportunities in Germany, France, and some of the countries there that are doing well.

Nancy Zambell: Would you buy ETFs in those countries, rather than individual stocks?

Jim Farrish: I would, just because the ETF makes it simpler for me to know that I own a specific index within those countries. Like with iShares S&P Europe 350 (NYSEARCA:IEV), I'm going to own the MSCI 350 index for the European market, so I know I own 350 stocks. I prefer that versus trying to find stocks there.

Nancy Zambell: That makes a lot of sense, plus it gives you a wide diversification.

Jim Farrish: Exactly. Also, you know you still have the currency risk issue, but you can hedge that currency risk by again using ETFs. If you think that the euro is going to go down, then you can buy the Short Euro ETF (NYSEARCA:EUFX) to hedge the currency risk of owning those stocks.

Nancy Zambell: Okay, and speaking of hedging, there was an article about hedge-fund investors really flying into the Financial Select Spyder (NYSEARCA:XLF), and you wrote a bit about that in your last column.

Jim Farrish: It's been a big push there. And the piece that actually has done the best has been insurance stocks, which is the Spyder Insurance ETF (NYSEARCA:KIE). I like that space going forward. I think the insurance companies continue to do well there.

But the regional banks are also doing very well, which is the Regional Banks ETF (NYSEARCA:KRE). I think those two subcomponents of the total picture are there, but don't count financials out.

I still think you're seeing a lot of money flow. It's kind of been a silent money flow from the institutions and the financials. I think that they believe, and I believe with them, that it's a great sector to own going forward for the next 18 to 24 months.

Nancy Zambell: Jim, is the KIE property-casualty, as well as life insurance companies?

Jim Farrish: Yeah, it does have both. The P&C companies are actually doing pretty well. We've had some major storms like Sandy, but that actually wasn't as big of a hit because it was flood, which falls under FEMA guidelines for the federal government.

A lot of people thought that those property casualty insurance companies had a lot of risk, but the flood was two-thirds of the writedowns on these companies, so I think they're still doing well going forward.

Nancy Zambell: Very interesting. And lastly, let's talk a little bit about natural gas. There have been some short sellers in that arena recently.

Jim Farrish: I don't know that I would be short natural gas, but I think it's definitely in a confirmed downtrend. There are supply-demand issues. I think it's a trade, at best.

But First Trust Natural Gas (NYSEARCA:FCG) still does very well because they're a little bit more diversified into some of the other petroleum business. It broke out a couple of days ago to the upside. I still like the upside of FCG, but I do think natural gas probably goes lower...but I'm not brave enough to short it here.

Editor's Note: This article was written by Nancy Zambell of MoneyShow.

Below, find some more great investing and trading content from MoneyShow:

A Three-Prong Approach to World Markets

The End of the ETN Tax Advantage?

Using a Breakout Trading Strategy for ETFs

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