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Cyclical ETFs are hitting new highs—here's what that could mean for investors

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Here's how experts are trading ETFs with stocks at all-time highs

The major averages aren't the only things hitting all-time highs.

Also on the new-high list are technology and industrial stocks — tracked by the Technology Select Sector SPDR Fund (XLK) and the Industrial Select Sector SPDR Fund (XLI), respectively — a counterintuitive pair to be hitting records in a market where global slowdown fears are still simmering.

Typically seen as "cyclical" sectors, or those beholden to economic ups and downs, tech and industrials reached fresh all-time highs Monday and Tuesday despite concerns around slowing growth. While tech has been on a steady climb higher for much of 2019, industrial stocks hit a level not seen since 2018.

Looking at the gains in these groups — as well as the new highs in the iShares MSCI exchange-traded funds tracking Italy, Germany, France and Japan — experts largely attribute the moves to investors playing catch-up.

"People are reaching for things that were supposed to be down, things that [had] given up the ghost," Steve Grasso, managing director of institutional trading at Stuart Frankel, said Monday on CNBC's "ETF Edge."

Still, Grasso acknowledged what some might be wondering about this surge higher, "Is it that [investors are] reaching for the last thing and it's the last gasp of the rally, or is it just throwing in the towel and knowing that we're going higher overall?"

For him, the answer is in the charts. Most of the aforementioned ETFs have made back their losses from the broad market's drop in October 2018, telling him that investors may be rethinking what they initially believed was the start of a sustained decline.

"This, to me, is people saying, 'We got caught off guard,'" Grasso said. "I don't think it's over just yet."

Deborah Fuhr, one of the world's leading experts on ETFs and the founder of independent research and consulting firm ETFGI, also felt that the recent push higher was tied to investors revisiting their positions.

"I do think people are thinking there's still more upside," she said in the same "ETF Edge" interview, adding that there's "more money going into ETFs than any other investment product right now."

"I think they've gotten used to some of this stuff just being out there as news, like Brexit," Fuhr said. "So, I do think that investors see many markets still having more legs to go. And China's been doing well, too. It's probably going to be the best-performing market this year where people thought China was really a problem this year. So, I think people are taking a fresh look at where they should put money to work."

DataTrek Research co-founder Nick Colas noted that these catch-up buyers most likely aren't paying much mind to earnings expectations or comparisons, which have been negative for the last three quarters and just turned negative for the fourth quarter.

"Clearly, the market's not focused on that," Colas said in the same "ETF Edge" interview. "They're thinking about that narrative ... which is if we get a trade deal [and] better economic growth and it's global, then [the] S&P, which is 38% international [companies], is going to have maybe 5, 6, 7% earnings growth next year."

That thesis will be helped by a slightly weaker U.S. dollar, Colas said.

"You saw global yields hit this sort of cataclysmic low in August like the world's over," he said. "The dollar hit a high, the fear trade was maxed out, and ever since then, we've had this slow narrative that trade's going to get better, the U.S. and China will come to some conclusion. Next year's an election year, so there's a lot of incentive to do that. Dollar weakens, yields go up, economic growth resumes. That's the rally we're seeing right now."

Disclosure: Steve Grasso's children own shares of the iShares MSCI Japan ETF (EWJ).

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