ETFs Continue Their Historic Slide Down

This week the stock market experienced a historic 1,871-point-plus pullback -- called "startling" by President Bush -- after a coordinated global effort to shore up the world's financial system didn't achieve its intended effect

Last Friday Congress passed a $700 billion bailout plan of the U.S. financial system. That action was followed Wednesday by global interest rate cuts by several central banks, including the Federal Reserve, the Bank of England, the European Central Bank and the People's Bank of China. Those were unprecedented moves to get the world's financial engine back in gear. On Friday there were even rumors (quickly dismissed) out of Europe that countries would temporarily halt global trading in an effort to calm the world's markets. Indeed, Russia pulled a similar move and may jump into the market and buy securities.

Unfortunately, no idea or action seems to be having a positive impact. What has plagued markets across the world is forced selling. As firms try to survive the credit crisis, investors are pulling tens of billions of dollars out of equity markets every day. That is evidenced by the week's volatile trading patterns. On Friday the Dow Jones Industrial Average dropped almost 700 points at the opening bell before roaring back to even territory, falling 515 points once again and then recovering. Most of the week the major dips happened in the last hour of trading when big funds had to sell stocks to cash out their fleeing shareholders.

Of course, investors are also bailing on companies that are spiraling downward. But there are other events playing out behind the scenes, too. Sellers of credit defaults protection on Lehman Brothers paper could be forced to pay as much as $270 billion after an auction Friday, according to Bloomberg. With such uncertainty it seems fear is the overriding sentiment behind trading. And until that dissipates stocks will continue to sell off.

It didn't help that there wasn't much positive corporate news this week. General Motors (GM) and Ford (F) traded lower over estimates of poor auto sales this year and in 2009, too. There were wire service stories speculating the firms may be forced into bankruptcy at some point. (The companies denied they would have to take such measures.) Citigroup (C) abandoned its effort to acquire Wachovia (WB). That means Wells Fargo (WFC) becomes the front runner to acquire the firm. It was revealed that AIG (AIG) has borrowed around $70 billion from the government and is now looking to quickly sell assets to pay down that debt. General Electric (GE) announced a disappointing 22% drop in third-quarter earnings.

The Dow closed down 1,871 points this week to 8,451. It was one of the worst weeks of trading in the history of the stock market. Oil hit the $80 per barrel mark after dropping $6 per barrel. It was down 17% this week.

The last five trading sessions were all about trading financial stocks. The ProShares UltraShort ETF (SKF) was one of the only ways to short financials while the SEC ban was in place (the ban expired Thursday). The fund gained 41% this week.

Actually, it was a good week to be short other industries as well. Energy has been selling off as investors fret over whether a global economic slowdown will curtail demand for oil and gasoline. The ProShares UltraShort Oil & Gas fund (DUG) gained 53.5%.

As we said, investors have been bailing on both energy commodities and the companies that get them out of the ground, too. The SPDR S&P Oil & Gas Exploration & Production fund (XOP) lost 7% on Friday. The Market Vectors Gold Miners (GDX) dropped 12%.

Data Point * State Street released its monthly ETF snapshot. At the end of September, 704 ETFs held $579.5 billion, about $3 billion less than August. During the month 15 ETFs were liquidated.

Back At It * ProShares announced it would resume Thursday the normal process of creating new shares of its UltraShort Financials and Short Financials (SEF) ETFs. The company had temporarily suspended this process during the SEC's ban on short-selling financial firms.

Exit Strategy
Index Universe reported that FocusShares will close its four exchange-traded funds. The funds will liquidate Oct. 20.

Look for some news out of a G7 meeting that could be the catalyst for a brief rally.

Earnings & Conference Calls

Monday
Fastenal, Stanley Furniture

Tuesday
Altera, CSX, Domino's, Genentech, Intel, Johnson & Johnson, Pepsico, Supervalu, W.W. Grainger

Wednesday
Abbott, AMR Corp., Astoria Financial, Delta, eBay, JP Morgan Chase, Kinder Morgan Energy Partners, Coca Cola, WD-40, Wells Fargo

Thursday
Bank of New York, BB&T, Build A Bear, Citigroup, Cypress Semiconductor, Evergreen Solar, Fairchild Semiconductor, Google, Illinois Tool, IBM, Nokia, PPG, Stryker, Winnebago, Zions

Friday
Comerica, Honeywell, LaBranche, Schlumberger, Sonic, Wilmington Trust

Economic Data

Wednesday
7:45a.m. ICSC Chain Store Sales
8:30a.m. Sept. Producer Price Index
8:30a.m. Sept. Retail Sales
8:30a.m. Oct. N.Y. Fed Manufacturing Index
8:55a.m. Redbook Retail Sales Index
10:00a.m. Aug. Business Inventories

Thursday
8:30a.m. Aug. Consumer Price Index
9:00a.m. Aug. Treasury International Capital Flows
9:15a.m. Sept. Industrial Production
9:15a.m. Sept. Capacity Utilization
10:00a.m. DJ-BTMU Business Barometer
10:00a.m. Sept. Philadelphia Fed Business Index
1:00p.m. Oct. NAHB Housing Market Index

Friday
8:30a.m. Sept. Housing Starts
10:00a.m. Mid-Oct Reuters/U Mich. Sentiment Index

A look at how the industry's most popular ETFs did on Friday.