Why An Upcoming Pullback Could Whack Financial ETFs

NEW YORK (ETF Expert) --U.S. stocks (S&P 500) have packed on Olympic-sized gains through the initial eight weeks of 2013. Federal Reserve policy uncertainty aside, 6%-plus capital appreciation on low volatility is impressive by any measure.

The bulk of the run-up is attributable to industries tied to economic growth and enhancement. Sector ETFs that represent financials, industrials, technology and energy have been the most prominent performers. This is particularly remarkable when one considers the high probability of a sequester drag on the U.S. economy.

However, it is unusual for a diversified investment like SPDR Select Financials (XLF) to catapult 20% without a modest amount of resistance. It's even more uncommon for traders to ignore the temptation to reduce their exposure. In fact, rallies that go unchecked are often prone to temporary reversals that may erode half of one's unrealized profits.

It follows that a 5% corrective phase for the broader market could see XLF drop 10%. In fact, with XLF 12.5% above its long-term (200-day) trendline, you might even see a double-digit percentage drop.