Just prior to market's sharp decline, Peter Way cautioned his readers, "There are increasing odds that some market-wide bad times are ahead, and may be getting closer."

Unlike many advisors whose forecasts are based on highly subjective criteria, Way's prediction was based on a specific set of factors that he monitors -- the trading activities of institutional market makers, the positions they establish for their "big fund" clients, and the insurance they take out to hedge these positions. It's a fascinating strategy for more sophisticated investors.

Here, in his Block Trader ETF Monitor he explains, "For some time now, the million-dollar market-makers have sensed that their big fund clients are prepared to flee at a moment's notice. And they know that the exit door is only just so big. Nowhere big enough to let them all through.

"These volume market-makers have been protecting their positions in S&P500 stocks in a very unbalanced way. They've looked for extreme downside price protection in fifteen times as many stocks as the number where they sought extreme upside protection. In our experience this is as far out of normal as we have seen at other times before major market breaks."

Having so accurately forecast the market's recent pullback, it behooves us to listen to Way's cautionary comments about the current role that exchange-traded funds may have during a correction.

He explains, "When ETF shares are sold and there are no buyers among the public, the fund management company behind that ETF must redeem the shares, paying the seller his desired cash. To obtain that cash the company must now sell the stocks it has been holding.

"If the investing public (including institutions) wouldn't buy the ETF shares, how likely is it that they will be eager buyers for the stocks? The manager may get stuck behind a general market decline where they can't sell the stocks at all because there are few if any upticks.

"Now what happens? If the ETF manager refuses to redeem the shares, there probably will quickly arise a situation much like a bank panic, where depositors are screaming for their cash. The so-called 'circuit breakers' may again be put to the test. Don't get me wrong, I pray for any 'stress test' to be met successfully. But be aware that it may be coming, maybe sooner than we think."

Meanwhile, his ongoing analysis of large block buying in ETFs suggest that few offer the upside expectations that would warrant a recommendation on his part. However, he adds, for those intent on putting money into ETFs, he does see a few select situations that stand out, and do in fact meet his "hurdle rate" of an expected gain of 5% or more over the coming three months.

The most attractive sector play from his big money analysis is streetTracks SPDR Homebuilders ETF (NYSE: XHB) He says, "Within the homebuilder sector, the volume market-makers see enough interest stirring in their big fund crowd, now that the stocks have sold off substantially, that XHB looks to be an odds-on candidate.

"In the past under these circumstances it has had higher prices in 80% of the days of the next three months, where the higher price gains averaging +8% were double the size of the far less frequent lower price day losses. And the worst loss days were less than -4% experiences."

The next most attractive sector play in his analysis is the First Trust Internet Index ETF (ASE: FDN). He says, "This exchange-traded fund shows a slightly better odds history on a slightly lower payoff scale, including lower loss exposures. The worst experiences there have averaged a decline of less than 2%."

For more stock picks from the leading financial newsletter advisors, visit Steven Halpern's free website, TheStockAdvisor.com.