One of the best ways to analyze market sectors is to look at the exchange-traded funds (ETFs) that represent them.

ETFs are one of the fastest-growing investment instruments. Over the past couple of years, hundreds have hit the market, giving investors a simple way to diversify their portfolios and increase their exposure to different sectors and markets. Here are a few other benefits:

An Entire Market In One Trade: ETFs consist of a group of different assets in one security. ETFs reflect the performance of the underlying sector/market that they represent. So instead of researching different stocks, you can benefit from an entire sector/market in just one investment. For example, you can play the gold or oil market through one of several ETFs. And if gold/oil prices go up, so will your ETF. If the British pound moves higher, so does the ETF linked to it. You can also buy ETFs to capture downside action, plus ones that double the move of the underlying market.

Major Diversity And Portfolio Protection: ETFs cover geographic regions, countries, indexes, sectors, commodities, and currencies. By investing in an ETF that represents an entire market and includes many different assets, you spread your risk and protect your portfolio, while also benefiting from the upside growth possibilities of many stocks.

Easy To Execute Trades At Any Time: ETFs trade on the major stock exchanges like regular stocks, and you can buy them through any brokerage account any time you like. In this regard, they're more flexible than mutual funds, which you can only buy at the closing price each day and which typically require a minimum holding period.

Lower Cost: ETFs are also cheaper than mutual funds. While mutual funds require a minimum investment, you can invest as much money as you want in ETFs. In addition, their maintenance fees are much lower than mutual funds.

Knowledge Of Holdings: You can easily see the top holdings of any ETF. For example, the Energy Select Sector SPDR (AMEX: XLE) consists of the world's biggest oil stocks like ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP). Many ETFs will also inform you of any changes to the holdings.

Simply put, no matter what kind of investor you are and what your style is, ETFs are a diverse, flexible, and safe way to invest. So let's get to some analysis -- and give you three ways to profit...

Want To Gauge The Chances Of A Recession? Keep An Eye On This Crucial Sector
Recession. The financial pundits can't talk about it enough at the moment. Is the U.S. economy in a recession or not? If so, how bad is it? How bad could it become? When will it end?

The technical definition of a recession is two or more successive quarters of negative GDP growth, and the housing market correction (which began in 2007) and the subprime mortgage crisis that triggered a wider financial sector meltdown have greatly enhanced the chances of a recession.

In fact, some economists believe the economy is already in recession. These factors certainly had an effect during the fourth quarter when GDP growth hit just +0.6%. The initial first-quarter GDP growth estimate is due out on April 30th, and this should provide more clues. But for a better idea, just take a look at this sector...

The last recession occurred because of the "Dot Com" collapse, the September 11th attacks, and corporate accounting scandals. But surprisingly, these events contributed to a relatively mild contraction. The one factor that prevented a much worse recession was the continued spending of American consumers, despite the stock market woes.

This time though, things are different. The Consumer Confidence Index fell another 12 points in March and is now at its lowest level since 2003. Worse still, the Expectation Index (the forward-looking part of the index), which makes up 60% of the Consumer Confidence Index, is at a 35-year low. This is largely due to the housing market deflation and because many American homeowners have a good portion of their net worth tied up in their homes.

The truth is, consumer discretionary spending has slowed. You can see this reflected in the weekly chart of the Consumer Discretionary SPDR (AMEX: XLY).

The stock has endured a steady fall since last summer, and since trading as low as $28 in January, it has consolidated below its 200-week moving average.

The key number here is $34, as that's where both the 200-week moving average and downtrend line meet. As time goes by, this trendline and the 200-week moving average will move lower, regardless of what type of slowdown we're facing.

Downside Scenario: If the U.S. is headed for a full recession, XLY will probably trade below $28.

Upside Scenario: A weekly close back above these two indicators will tell us that consumers have regained their resiliency, and the worst is probably behind us.

The Sector That Started The Mess Is Now A Whisker From Critical Resistance
Since the massive financial sector was one of the catalysts for the market correction, let's check out the ETF that represents the sector -- the Financial Select Sector SPDR (AMEX: XLF).

Having hit a high of $38.15 in May 2007, XLF has traded steadily lower, culminating in price action below $22.50 on March 17th -- the day the Federal Reserve and JP Morgan (NYSE: JPM) bailed out Bear Stearns (NYSE: BSC). Since then, however, it's traded above that level and is closing in on a critical resistance level around $27.40.

The highest the stock has come to that level since reaching its March lows is $27.37 on March 24th. But the more bullish action hasn't yet been enough for it to break out of its downtrend regression channel, drawn off the May 2007 highs. But it's close! With the upper channel at $27.40, a weekly close above that level should be bullish.

So how about one of the market's other mega movers?

The Commodities Correction Means An Opportunity In The Metal Market
The U.S. dollar remains mired in a morass of negativity. However, although it's still trading relatively close to its lows, it may catch a break because a number of commodities have corrected. That includes the precious metals, so let's take a look at the ETF that tracks the price performance of gold -- streetTRACKS Gold Shares (NYSE: GLD).

As XLF made its lows on March 17th, GLD set an all-time high above $100. This isn't surprising, given that gold is a great hedge against economic turmoil. But as gold has since lost some of its shine, GLD traded below $87 in April. Yes, it's rebounded a bit since then, but the correction may have further to go. Take a look at the weekly chart of GLD:

GLD has spent the last couple of weeks in consolidating, but is currently trading below its 50-day moving average. This means there may still be some downside left.

Having hit an April low of $86.05, my analysis suggests that a move below this level should see GLD decline to at least the $83.20 area. This area also represents a 38% Fibonacci retracement off the June 2006 lows.

Bottom line: If the U.S. Dollar continues to struggle, or if traders decide to liquidate their gold positions for other reasons, the $83 area would be a good level to start accumulating GLD shares.

The Longer-Term Outlook
Longer-term, critical support for GLD comes in around the $73 level. As you can see on the chart, this area not only represents the long-term uptrend line, but also the May 2006 high (this was previous resistance that has turned into support).

There are a number of reasons that could cause GLD to drop to this $73 area. Among them: Some kind of event that leads to a mass sell-off in the gold market... strength from the U.S. dollar... or just a normal correction. But if that occurs, it would offer a great buying opportunity.

Thanks for joining me.

Jim Stanton

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With more than 30 years experience as a stockbroker, bondbroker, commodities trader and hedge-fund consultant, Jim Stanton has seen most of what the stock market can throw at investors -- and knows how to avoid the landmines. His impressive range of technical analysis and quantitative systems have generated outstanding profits for individual investors, private clients, and hedge funds alike. Today, he writes for the Xcelerated Profits Report investment newsletter, free Smart Profits Report e-letter, and runs his own ESP Profit System trading service -- using his cutting-edge, computerized trading platform.

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