Watch These 3 ETFs If You Are Worried About A Downturn in Stocks

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The average time between U.S. recessions since World War 2 has been six years and five months. Little wonder then that, after a recovery from recession that has lasted ten years, the debate among most economists and analysts is not whether there will be another, but when it will come.

Some maintain that it is imminent, while the more popular view is that it will arrive some time next year. Whatever the preferred timeline, the feeling that the good times can’t last forever is widespread. The inverted yield curve that we are currently seeing has, in the past, been a reliable indicator of trouble ahead, but it would be nice to know how far ahead.

As we saw in the fourth quarter of last year, markets don’t need an actual recession to collapse. The S&P 500 lost around twenty percent then, primarily on just the fear that growth may be slowing, so investors wary of the next correction should be looking for signs of a shift in sentiment more than in data. There are three ETFs that started to move before the broader market then, and if you are concerned now, all three should be watched for signs of a drop.

Global X Copper Miners Fund (COPX):

Copper is a traditional advance indicator of economic conditions. Its use as a basic metal in construction and manufacturing means that fluctuations in demand often precede fluctuations in economic activity. The problem with tracking the price of copper, however, is that, as with all commodities, price is a function of demand and supply, not just demand alone.

COPX, as a fund made up of copper miners, is still subject to price fluctuations in the commodity, but as increased supply also means increased production by the fund’s constituent companies, the influence is diminished somewhat. In addition, the price of the miners is influenced by demand expectations to a large extent, rather than current demand conditions. As we are looking for indicators of sentiment more than conditions, that makes COPX more useful than just the commodity price.

iShares PHLX Semiconductor Fund (SOXX):

Semiconductors are essentially a more modern equivalent of copper as a leading indicator. While the metal reflects demand in traditional manufacturing and construction, so semiconductors reflect demand in tech. Again, the chart clearly shows warning signs beginning in June last year, around four months before the S&P 500 reacted.

Here too, both supply and demand are factors in the price of the commodity, and therefore in the prices of the manufacturer’s stocks that make up the fund but, when both COPX and SOXX tell the same story, it is far more likely to be a tale of fear of demand declines than to be simply about increasing production.

iShares High Yield Corporate Bond ETF (HYG):

High yield corporate debt, sometimes referred to by the less flattering name, junk bonds, is an indicator of the market’s appetite for risk. Low grade bonds are risky by definition, but the fortunes of then companies that issue them, and therefore the degree of risk in them, are very sensitive to overall economic conditions.

HYG (or the SPDR equivalent, JNK) are useful in two ways. First, they are not as prone to supply-prompted fluctuations as the two commodity-based ETFs, and second, the correlation between moves in high-yield and in stocks is more immediate. Last year, for example, following a period of hesitancy as stocks continued to climb, the downturn in HYG began just a couple of days before it came in stocks.

There is, of course, no foolproof indicator of the direction of the stock market. If there were and I had found it, I wouldn’t be wasting my time writing about it. What there are though, are several markets that, in the past, have tended to anticipate moves in stocks. Copper, semiconductors and junk bonds are examples of that, and watching all three of these ETFS could help you to anticipate the downturn that history tells us will come before too long.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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