While major U.S. stock indices have posted slight gains over the past six months, a number of Exchange-Traded Funds have tripled or quadrupled those profits for investors. To gain a better appreciation for what has taken place, here are the six-month gains for the major U.S. averages:

• Nasdaq +9.18%
• Dow Jones Industrials +6.28%
• S&P 500 +6.13%

All things considered, those numbers really don’t seem that bad. Most of the gains during that six months came during two nice runs–one in November 2005 and another in early January 2006. For the rest of the period these averages have generally traded flat. But these gains seem minimal when compared to some of the performances by ETFs over that period. For comparison, here are the gains by some of the top-performings ETF sectors:

• Internet Infrastructure HLDRS (IIH) +36.72%
• IShares Dow Jones Transportation Index Fund (IYT) +23.61%
• IShares Cohen & Steers Realty Major Index Fund (ICF) +22.77%
• StreetTRACKS Gold Trust (GLD) +21.17 (not shown on the chart)
• IShares MSCI - Brazil Index Fund (EWZ) +19.38%

I’m including a chart to give a better picture of how these funds did over that period. In addition to the funds listed above, I’ve added two other ETFs for comparison. IWO is iShares Russell 2000 Growth Index Fund. The Russell 2000 is comprised of small cap stocks and has been the best-performing U.S. index over that period. IWO is up +16.67%. I also added XLE, Select Sector SPDR - Energy, just so you can see how the energy sector has fared. It is up +1.82%.

At the bottom of this page I’ve included a table with information about how all the ETFs fared over the past six months, ranked from top to bottom by return.

A weak Nasdaq breakout

Trailing the Dow and the S&P 500 by more than a week, the Nasdaq finally reached a new multi-year high on Wednesday and also eclipsing the peak it reached in January. The other two indices followed their advance to new highs by dropping back into their trading channels wherere they have remained since. It is a little early to forecast whether or not the Nasdaq will follow a similar pattern, but let’s keep our fingers crossed and hope that it does not. One thing that has been quite unusual over the past eight weeks has been the amount of divergence between the Nasdaq and the other two indices. Normally if one is up on a given day the other two will also advance. But we have seen many days during this period where the Nasdaq has moved in the opposite direction of the Dow and the S&P 500.

I’m including a chart of the Nasdaq and I’ve added a red line to illustrate the breakout. I’ve also included a few other tools that seem to indicate the Nasdaq has the strength and momentum to continue this rally. For example, the gold line on the top portion of the chart is a simple 50-day moving average. The index is currently trending well above that mark. Likewise it is trending above 50 on the Relative Strength Index on the middle portion of the chart. The bottom portion is a Moving Average Convergence Divergence (MACD) and it also is showing that the Nasdaq is definitely in an upward pattern.

Friday my youngest son had a day off from school so I stayed home to do some things with him. I can honestly say that I didn’t even think about the stock market until late that evening. That changed after an offhand comment from my wife. My beautiful bride pays no attention to the stock market. So when she told me she saw a news broadcast earlier in the day reporting a breakout day in the stock market, that caught my attention.

“What exactly did they say?” I asked.

“They said the Dow set a new record high, as high as it was several years ago when the markets were going crazy.”

That really piqued my interest, so I quickly turned to a news channel so I could find out what caused this dramatic market surge. As I listened to the reports of the day’s market activity, the broadcaster made it sound like the day’s events were truly significant. Unfortunately, the tone of the reporting was misleading at best. It was true that the Dow and the S&P 500 reached new multi-year highs on March 17. Unfortunately, that fact alone is virtually meaningless.

Below is a 10-year chart of the Dow and the S&P 500 to show what I mean. The black line is the daily price movement of the Dow and the gold line is the S&P 500. Notice that while the Dow reached its highest point since 2001, it really did not make a dramatic breakout. Here’s another way to look at it: Since the prior peak in 2001, the Dow has now advanced 0.14%. If I am an investor who bought the Dow in 2001 the fact that five years later I am now back to even on my investment does not make me feel warm and fuzzy. And if instead, I bought the Dow at its all-time high in January of 2000, I’m still down about -3.5%.

Don’t get me wrong, I’m always happy when the market is advancing. But after reaching that peak on Friday, major averages have since dropped right back into the narrow trading channel that has constrained their movements for more than two years. Since the beginning of 2004, the Dow has advanced 7.5%. Since Nov. 3, 2005, the Dow has advanced 7.5%. In other words, we keep covering the same ground.

Take another look at the chart and see the month-to-month and year-to-year volatility of these indices for the first eight years of this chart. Those wild swings can be frightening, but they also make it possible to make money. Remember the old investing adage of “buy low and sell high?” For more than two years the difference between the lows and the highs has only been a few percentage points so it has been difficult to heed that advice.

Last week I outlined some reasons why I think the major market averages are soon going to break through the top of this range and stage a more significant rally. I still think that is the most likely scenario. But I’m not going to get excited until the indices break through the top of the channel and advance for several market sessions. I will also be more excited about a rally in the Nasdaq than in the Dow and the S&P 500. Often blue chip stocks rally when people are worried about market conditions. They seek the security of big name stocks. Most major market advances occur when the Nasdaq is the leader.

We continue to see industry sectors rotate leadership roles as the economy and markets try to resolve this sideways consolidation and decide whether or not the major averages will advance or retreat. In recent sessions we saw weakness in real estate. IShares Cohen & Steers Realty Major Index Fund (ICF) is still up 3.6% over the past month and these funds are still in an uptrend even though they saw a couple sharp down days. The telecommunications and transportation sectors are also still trending up. Over the past month, the best performing ETF has been Merrill Lynch’s Internet Infrastructholdr’s (IIH) which is up 7.5%. The top international funds have been Sweden (EWD) and Japan (EWJ), up 6.7% and 5.5% respectively for that period. Some of the weakest sectors over the past month have been energy and gold–sectors that led the markets just a few weeks ago.

For several weeks I’ve written about the tight sideways channel. I keep hoping for a breakout either up or down. I can’t stress enough how unprecedented it is to have this long a period with such a narrow trading range. As long as the markets remain in this state, it is going to be very difficult for anyone to make money.

Have a great weekend.

I don’t really enjoy amusement park rides. The truth is, they scare me to death–not just the triple-loop, vertical plunge rides either. One of the rides that frightens me most is a pirate ship that swings back and forth like a pendulum. My wife and children are quite amused by this particular fear because they view the ride as nothing more than a giant swingset. They always choose the seats at the ends of the ship becaudse they swing the farthest and people in these seats get the wildest ride. I prefer the middle seats where the ride is less thrilling and I can be the first one off when the ship stops.

If I stand to the side and watch, the ride looks like it would be fun and not frightening even to me. Everyone seems to enjoy it and it only lasts three or four minutes. But once I am aboard and the ride starts, I find the sensation extremely unpleasant. The experience seems to drag on three or four times as long as I expect. So while I’ll still do an occassional mild roller coaster, a water ride or the spinning teacups, the pirate swing is out.

I make this highly personal revelation because I suspect many short-cycle index investors have experienced similar feelings over the past several weeks. During the past two months, stocks have traded in an extremely narrow trading range. This is by far the most difficult possible situation for any investor or trader to make a profit.

I’ve included a chart below to illustrate the situation. This is the Nasdaq and the area between the two blue lines is the channel that has persisted since mid-January. There is less than a 3% varience between the top and the bottom. This is a candlestick chart. The red vertical bars are down days and the open vertical bars are days when the Nasdaq gained. Notice that within the period between the blue lines, there essentially is no period where a trend can be identified. This is why it is so difficult to make money even for someone doing short-term trading. Anyone trying to trade the Nasdaq short cycles during this time has undoubtedly been whipsawed. So even though the trading range has been less than 3%, there is a sensation of lots of volatility. This would create a feeling that is the investment equivalent of my pirate swing experience.

The green circle outlines the only short-term trend of this three-month period. In early January the Nasdaq strung together seven positive days. That provided the only legitimate profitable trading opportunity of this period. The bottom portion of the chart is a Relative Strength Index (RSI). Some investors use this as a trading tool. They buy when the index rises above the 50 mark and sell when it drops below. Notice that this system would have produced several whipsaw trades since mid-January. In fact, I reviewed several different trading systems that all struggled with whipsaws during this time.

Normally, I make no attempt to forecast what the markets will do because there are too many unpredictable factors. I generally look for sectors and markets that are in long-term trends and try to take advantage of favorable situations. But if I were forced to make a prediction today, I would say that the market is about to break out through the top of this trading channel and we are likely to see at least a short-term market advance.

Here are some of the reasons I believe the next move will be bullish rather than bearish:

1. There are just two weeks left in the first quarter. Traders and institutional money managers always like to end the quarter on a high note. They are going to be doing all they can the next two weeks to prop up the market averages so their clients see positive returns on their first-quarter statements.
2. Technical indicators are generally positive. Relative strength, up/down and new high versus new low ratios, momentum indicators and others are showing that this market has the strength to advance.
3. The intermediate cycle for the Nasdaq has generally been negative for eight weeks. Usually when an index moves sideways during a negative cycle, that is a sign of underlying strength. The cycle just turned positive again.
4. Economic fundamentals look good. The latest CPI shows that inflation is still no threat. Unemplyment numbers are good. First-quarter GDP growth is going to be strong. Energy prices remain high, but appear fairly stable.
5. Bearish sentiment. The latest American Association of Individual Investors weekly survey showed that more than 60% were bearish or neutral. This is a contrarian indicator. Simply put, the majority of individual investors are usually wrong. If everyone thinks the market is going to decline, it probably is going up.

In fairness, I could also come up with legitimate reasons that the market’s next move will be down. But my overall impression is that there are more positives than negatives right now. Of course, there is no guarantee that I am right. Often I am not. In general, though, I feel more like I am just getting off the pirate ship swing than like I am about to get on.

Have a great weekend. I’m looking forward to the start of spring on Monday. We haven’t seen many hints of spring so far in March but I know it can’t be far off.

I’ve been actively involved in the investment markets for almost two decades. The past six weeks have produced some of the most difficult trading conditions of that time–particularly for major market averages like the Nasdaq, S&P 500 and the Dow Industrials. Tight choppy trading has made it nearly impossible to make money trading these indices.

Amidst all this market gloom and misery, Exchange-Traded Funds (ETFs) have provided some welcome opportunities. We’re not talking double-digit returns during that time, but at least there are a handful of sectors that have produced positive gains. Contrast that to the Nasdaq, which since the start of February is down almost 2%. It shows up as the purple line on the chart below. What makes this pattern especially difficult is the lack of even short-term trends–moves that last five or six market days.

Since the start of February, the most productive industry sector has been telecommunications. The red line is Merrill Lynch Telecom HOLDRS (TTH). It has gained 7% over the period shown. There are several other telecommunications funds that have done well, including iShares Dow Jones U.S. Telecommunications Index Fund (IYT), iShares S&P Global Telecommunications Index Fund (IXP), and Telecom Brasileiras (TBH). Telecommunications remains a sector that has potential for continued and explosive growth. Here in the U.S. where every family has at least half a dozen phones and several phone numbers, we take this industry for granted. There are still many areas of the world where making a phone call is difficult and expensive. Significant changes have occurred in the past decade, but there are still many opportunities for exponential growth in emerging market areas.

Another sector that has done well in recent weeks is real estate. For at least a year now, we’ve heard dire reports and predictions for the U.S. real estate market. Extremists are calling for a collapse of housing prices that will lead to a nationwide economic meltdown. For months I’ve written that there is not a national real estate bubble that is going to burst. Certainly there are regional areas where speculation has raised prices to unsustainable levels. But that is not the case in most of the nation. From a historical perspective, long-term mortgage rates remain low and housing is still affordable for most Americans. There are problems with interest-only loans and rising rates on adjustable rate mortgages. But the fact remains that people are still buying homes at a record pace in many areas.

The yellow line on the chart is iShares Cohen & Steers Realty Major Index Fund (ICF). It has gained 3% over the period shown and more than 13% over the past six months. Another real estate fund also doing well is streetTRACKS Wilshire REIT (RWR).

The green line on the chart is iShares Dow Jones Transportation Index Fund (IYT), up 2% over the past five weeks and nearly 22% over the past six months. The transportation sector is benefiting from lower oil prices and this fund will probably continue to do well until that situation changes. In comparison, the lower oil prices have pounded energy funds since the first of February. Most have lost somewhere between 7% and 15% since that time.

The drop in crude oil prices has also hurt Latin American and emerging market funds. This group had been a top sector over the past year, but these funds dropped sharply in the past three weeks and broke through the bottom support of their trading channel. Investors holding these funds should probably look for an exit point. While it is possible they could resume their upward trend, it is likely that other sectors will offer better profit opportunities in the near future.

In addition to the sectors mentioned above, there are a handful of other individual ETFs that produced positive gains in the past five weeks. But it is a little early to declare that they have established new bull trends. Part of the reason major indices are still trading in a narrow channel is that the economy is likely at a transitional juncture. When stocks break out of this channel, it is likely that the leading sectors will not be the same ones that held the top spots during the past year or so. Another week or two should bring a much clearer focus.

I really don’t enjoy winter. I’ve always thought it would be nice to live someplace where it stays warm all year. I’m a proponent of Global Warming. It can’t occur too fast for me. Unfortunately fate seems to have conspired instead to make certain that I spend much of my life in some of the world’s colder climes. About this time each year I begin to wonder if warmer weather will ever return. Of course, that is usually about the time the days start getting noticeably longer and the big piles of snow start disappearing from parking lots.

Two months into the year, 2006 is proving frustrating to investors and professional money managers alike. The first 10 days of the year showed great promise as stocks surged and provided hope that the next major bull market rally was beginning. Unfortunately, the advance stalled and the markets have been unable to make any headway since. Because Janaury turned out well, the lack of follow-through in February has many investor extremely worried. In fact, many might be wondering if the markets will ever advance again.

Below is a chart I think will provide a clearer picture of what is occurring. This chart shows the daily price movements of the Nasdaq since the beginning of the year. Each vertical black line represents the daily trading range of the Nasdaq. On the left side of each black bar, you can see a small, horizontal hash mark. That marks the open point for trading on the Nasdaq that day. There is a similar hash mark on the right side that marks the closing point of the day’s trading.

On the left side of the chart you can easily see how the Nasdaq began the year with a strong upward move that peaked in the second week. Since then, the Nasdaq has whipsawed almost daily, providing no real trading opportunities. I added a red horizontal line that shows where the Nasdaq was at the end of January. You can see that February really ended right where it began. The blue line is just an arbitrary illustration of where the index seemed to cluster during the early part of February. It is about 2% lower than the red line. Since the middle of January, most of the the daily trading has stayed between those levels.

Over the past year, I’ve written several times that there are two market factors that must be present to make money in any investment. First are trends. Because of the wide range of short funds currtently available, it doesn’t really matter whether that trend is up or down. Whether one is trading short-term, intermediate, or long-term cycles, some sustained directionality is necessary. The second thing needed is volatility. Everyone knows that the secret to investing is to buy low and sell high, or vice versa. If the difference between the low and the high is only a percent or two, no real profit opportunity exists for ordinary investors.

Fortunately, volatility and trends are two things the investment markets usually have in abundance. The action of the past month is really an abberation and is not likely to persist much longer. How do I know this? Let’s consider the activity of the past couple of months in a longer context. The chart below is just like the one above only it includes a year’s worth of data. I’ve again added the same red and blue lines to Febaruary’s market activity. From this perspective, it is fairly easy to see that after consolidative, sideways periods like we’ve just experienced, the market generally follows with a more sustained move in one direction or another. In 2005 we experienced a similar sideways period in June, only to see stocks soar in July. Another similar pattern occurred in December, followed by the nice rally we mentioned in early January.

So just like I know that spring is just around the corner, I also know that major market indices like the Nasdaq, the Dow, and the S&P 500 are just about to make a bigger move. I also know that it is way too early to panic. Whether that next move is upward or down does not matter much for those who trade the ETFs that track major indices like Spiders, Diamonds or Qs. But for the sake of the U.S. economy, I would like to see a nice bull rally that persists for several months.

Finally, let me share a story. Years ago I used to help options expert Ken Trester with his trading seminars. He began each seminar by asking to borrow a $100 bill from one of the attendees. Then he would proceed to tear the bill into tiny pieces in front of the class. Audible gasps and looks of horror were typical reactions–not just from the person who contributed the bill, but also from other attendees watching. Afterward, he would talk to the group about how they felt when they watched that $100 bill being destroyed. Many admitted that it was difficult to watch, even though the money belonged to someone else. After the discussion, he would replace the bill that was ruined. But he was careful to explain that to be successful options traders, each attendee needed to be prepared to experience much greater losses during the process. He also told attendees that if it was emotionally wrenching experience for them to lose money, they probably needed to be buying Certificates of Deposits rather than investing in the financial markets.

A lot of investors spend a good portion of each day watching the value of their account and fretting about the fluctuating total. I hear them say things like “I lost $20,000 today.” Or, “I made $45,000 this month.” While I understand that financial security is important, I must admit I feel a little sorry for people who allow their daily mood or even their self worth to be dictated by a number on a piece of paper or on a computer screen. If I’ve offended some of you, I’m sorry. But if I’ve described you, then you need to think about making changes in the way you deal with your investments.

Quit worrying about the markets for a little while. There are more enjoyable things you could be doing–after all, spring is just around the corner. And the markets will still be here next week.