Financials Lead Stocks Lower, Precious Metals Higher

NEWS: The financial stocks were was again the culprit that took the wind out of the sails of the market. The Dow lost 239 points or 2.1%, led lower by AIG and Citigroup. The S&P 500 gave back 1.9% or 23 points on the day. And not even technology could sidestep the selling, the NASDAQ tumbled 2% or 46 points. Over the last three sessions the S&P 500 has dropped 3.8% after closing at a multi-week high. THE BOTTOMLINE: Blame it on the financials has become the slogan on Wall Street every time the broad market suffers a negative day. It may sound cliché, but in the end it is typically a true statement. Today the KBW Banking Index fell by 4.5% and the SPDRs Financial ETF (XLF) dropped 4.3%. There is no hiding the fact that the financials are not yet out of the woods and until they are, it will be difficult for the overall market to rally.

The key is to keep you exposure to the financials to a minimum if you must include all asset classes. Ideally you would like zero exposure to the sector, unless you are a short-term trader looking to play every gyration in the market. Today the news from the weekend that two more banks were rescued was enough to force the already anxious investors to sell first and ask questions later.

The one glimmer of hope for investors that invest in the commodities was the relative strength shown by stocks and ETFs that are related to oil and gold. Granted the gains at the end of the day were much smaller than they were at lunchtime, the diversity of owning commodity investments was a big help today. Remember that diversification throughout the market and the willingness to either keep money in the money market or hedge are two strategies that will help you get through this bear market.

THE DAILY ETF UPDATE - SILVER OR GOLD?

NEWS: The price of gold and silver has come down the last two weeks after hitting multi-year highs earlier this month. With both metals oversold and sitting on support, which is the better option? Today gold closed higher by 0.1% and silver was unchanged.

THE BOTTOMLINE: The similarities between gold and silver are obvious, but what drives on to outperform the other is the industrial demand. Silver, unlike gold, is cheaper per ounce and therefore is used by a number of industrial sectors that range from autos to photography. Gold on the other hand is 50 times more expensive than silver and is not a viable metal for industrial usage. Each metal has its pros and cons, but the diversity that silver offers is attractive during a volatile market. Year-to-date the iShares Silver ETF (SLV) is up 17% versus a gain of 11% for the SPDR Gold ETF (GLD).

I personally would like to offer you a definitive answer on which precious metal is the better investment, but honestly the best answer is both. Why not utilize the precious metal ETFs available and invest in both metals with one purchase. The most widely traded option is the PowerShares DB Precious Metals ETF (DBP), which is up 10% in 2008. DBP is not evenly split between the two metals (80% gold, 20% silver), but it is the best option. If you do not mind the extra trading commission, buying both GLD and SLV is also available. Either way you decide to gain exposure to the sector, investing in both gold and silver will decrease risk while not hurting reward potential.

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