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10,000 Reasons to Hedge Your Bets
by Daniel Sckolnik of ETF Periscope
“Do not go where the path may lead, go instead where there is no path and leave a trail.” ~ Ralph Waldo Emerson
Though it’s not quite officially over, for all practical purposes it’s time to say goodbye to the dog days of summer.
The markets spent the last few months surfing its own volatility wave, yet ending up pretty much where it started. The numbers speak for themselves. The Dow Jones Industrial Average (DJIA) started June 1 at 10,133. It ended Friday at 10,150. At the same time, the benchmark S&P 500 Index opened the start of June at 1087, closed Friday at 1064. Oil? Using the ETF USO as a proxy, its June 1 opening was 33.65. Now? 33.57. What about gold? Using the ETF GLD for a proxy, we see it opened June 1 at 120. It closed Friday at 121, indicating a total $10 swing in the precious metal over the same time period.
So, the markets have effectively been in Sideways City all summer long. But now, with the return of all the big-money players from vacation frolics and the accompanying increase in trading volume, it’s time to get serious.
September is close enough on the horizon to taste, and both the Bulls and the Bears are positioning themselves in preparation for their respective expectations. It’s time for what might just turn out to be the main event of the year: The Battle for Dow 10,000.
DJIA 10,000, a psychologically important level, has proven itself to be fairly effective in terms of support throughout 2010. It first was tested this year all the way back in February, then was temporarily violated during the May 6th “flashcrash” before recovering. It was breached more deeply during the summer months, but once again finds itself serving, at least for the moment, as support rather than resistance.
So who has the stronger field position, in regard to market direction in general? The Bulls or the Bears?
If you go by the past week, it would be something of a wash, pretty much reflective of the summer. The early part of the week looked on the grim side, with the Commerce Department estimating on Wednesday that new homes sales fell 12%, an all-time record low. On Thursday, the Labor Department reported that first-time claims for unemployment benefits dropped by 31,000. Despite the drop, the number of claims remained substantially higher than early June. The markets didn’t like either of these numbers very much, and were down 3 out of the first 4 sessions.
The downward trend looked to continue on Friday, when the initial reaction to Bernanke’s comments sent the Dow all the way down to 9,550. That trend reversed, however, when investors considered the Fed’s comments, as well as the Commerce Department’s report on second quarter growth. Though growth slowed down by 1.6%, it was still better than consensus expectations. The DJIA ended up 164 points on the day, leaving it down only slightly for the week, and leaving the Bulls snorting loudly with relief.
However, overall, if you draw trend-lines starting from late April, both the DJIA and S&P 500 have been slanting towards the downside, and could easily be read as favoring the Bearish perspective.
And there are other Bearish whispers whipping about as September approaches.
A piece of disconcerting news, that might be a harbinger of a new round of problems based on European debt, emerged midweek when Standard and Poor’s rating service lowered Ireland’s long-term sovereign credit rating a notch down to AA-. The service kept its outlook negative, so the ratings could drop further, and soon. And if this is happening to Ireland, it is not a stretch to expect similar problems with the rest of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Then there’s the Hindenburg Omen, a technical indicator that had successfully predicted the 1987 market crash. It has recently reemerged on the financial media’s radar due to a serious of triggers that have been tripped, indicating the possibility of another Dow debacle. The problem, however, is that the Hindenburg has predicted a series of other imminent declines, most of which never came to pass. Still, it’s enough to spook a lot of investors, a large percentage of which seem to be somewhat of a superstitious lot.
It can go either way, as always, though the markets are currently responding faster and more furious to the bad noise. And with the 10,000 level staring out at the investor, it seems as good a focal point as any to see if a year of sideways begins to take a turn in a clear direction. If it’s towards the downside, you might want to prepare for the event with an effort towards balancing your virtual portfolio. Next week we’ll look at a variety of choices on the ETF menu that you might consider adding to your defensive playbook.
What the Periscope Sees
Each week, ETF Periscope scans Sabrient’s SectorCast-ETF Rankings in search of a few good plays. The Rankings are forward-looking in general, going out about 4-6 weeks. Sometimes I’ll reemphasize the most recent selections, with an eye towards allowing them to play out. That’s what’s happening here, as I highlight both the Bull and Bear picks for an additional week. Chart references are updated as appropriate in order to bring everything up to speed.
In the Bull camp, QTEC (First Trust NASDAQ-100 Technology Sector Index Fund) sits within the top 10% of the Rankings. It is an equity fund which invests in stocks of companies operating in the Technology Sector and seeks to replicate the NASDAQ-100 Technology Sector Index by investing in stocks of companies listed in this Index in proportion to their weighting in the Index.
Looking at QTEC’s chart, we see it has fallen further below its 50-day and 200-day moving average this past week. Still, it remains about a dollar above what has served as strong support all year, and its Moving Average Convergence-Divergence (MACD) indicates an upward trend could be in the making.
A second selection from the Bovine camp is KBE (SPDR KBW Bank ETF), higher up and still within the top 5% of the rankings. This exchange-traded fund invests in stocks of companies operating in the Banking Industry, including national money center banks and regional banking institutions. The fund replicates the KBW Bank Index (Ticker: BKX) by investing in the companies of that Index in approximately the same proportion and, before expenses, seeks to closely match the returns and characteristics of that Index.
A glance at KBE’s chart reveals that for the second time in the last week, it bounced off a support level that has steadily served as the low point for the year. While it remains well below both its 50-day and 200-day MA, it does have significant upside, even if it just reverts back to its mean for the year. Fundamentally, the Rankings indicate strength, but that being said, a tight stop on this play would be prudent.
From out of the Bear camp, about two-thirds of the way down in the SectorCast-ETF Rankings, is IWP (iShares Russell Midcap Growth Index Fund), an exchange-traded equity index fund launched and managed by Barclays Global Fund Advisors. The fund invests in stocks of companies listed on the Russell Midcap Growth Index in proportion to their weightings in the index. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. The fund seeks to replicate the performance of Russell Midcap Growth Index.
IWP serves as a good proxy for the overall markets, and can be useful as a broad-based hedge against major negative market moves. You can buy slightly out-of-the-money put options a few months out, or short the ETF itself. Exactly how much downside “insurance” you choose to secure is a question for you to decide, reflecting your overall market bias as well as your risk-management strategies.
ETF Periscope
Click here to see the process behind the ETF Periscope.
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
“Do not go where the path may lead, go instead where there is no path and leave a trail.”
~ Ralph Waldo Emerson
Though it’s not quite officially over, for all practical purposes it’s time to say goodbye to the dog days of summer.
The markets spent the last few months surfing its own volatility wave, yet ending up pretty much where it started. The numbers speak for themselves. The Dow Jones Industrial Average (DJIA) started June 1 at 10,133. It ended Friday at 10,150. At the same time, the benchmark S&P 500 Index opened the start of June at 1087, closed Friday at 1064. Oil? Using the ETF USO as a proxy, its June 1 opening was 33.65. Now? 33.57. What about gold? Using the ETF GLD for a proxy, we see it opened June
1 at 120. It closed Friday at 121, indicating a total $10 swing in the precious metal over the same time period.
So, the markets have effectively been in Sideways City all summer long. But now, with the return of all the big-money players from vacation frolics and the accompanying increase in trading volume, it’s time to get serious.
September is close enough on the horizon to taste, and both the Bulls and the Bears are positioning themselves in preparation for their respective expectations. It’s time for what might just turn out to be the main event of the year: The Battle for Dow 10,000.
DJIA 10,000, a psychologically important level, has proven itself to be fairly effective in terms of support throughout 2010. It first was tested this year all the way back in February, then was temporarily violated during the May 6th “flashcrash” before recovering. It was breached more deeply during the summer months, but once again finds itself serving, at least for the moment, as support rather than resistance.
So who has the stronger field position, in regard to market direction in general? The Bulls or the Bears?
If you go by the past week, it would be something of a wash, pretty much reflective of the summer. The early part of the week looked on the grim side, with the Commerce Department estimating on Wednesday that new homes sales fell 12%, an all-time record low. On Thursday, the Labor Department reported that first-time claims for unemployment benefits dropped by 31,000. Despite the drop, the number of claims remained substantially higher than early June. The markets didn’t like either of these numbers very much, and were down 3 out of the first 4 sessions.
The downward trend looked to continue on Friday, when the initial reaction to Bernanke’s comments sent the Dow all the way down to 9,550. That trend reversed, however, when investors considered the Fed’s comments, as well as the Commerce Department’s report on second quarter growth. Though growth slowed down by 1.6%, it was still better than consensus expectations. The DJIA ended up 164 points on the day, leaving it down only slightly for the week, and leaving the Bulls snorting loudly with relief.
However, overall, if you draw trend-lines starting from late April, both the DJIA and S&P 500 have been slanting towards the downside, and could easily be read as favoring the Bearish perspective.
And there are other Bearish whispers whipping about as September approaches.
A piece of disconcerting news, that might be a harbinger of a new round of problems based on European debt, emerged midweek when Standard and Poor’s rating service lowered Ireland’s long-term sovereign credit rating a notch down to AA-. The service kept its outlook negative, so the ratings could drop further, and soon. And if this is happening to Ireland, it is not a stretch to expect similar problems with the rest of the PIIGS (Portugal, Ireland, Italy, Greece and Spain).
Then there’s the Hindenburg Omen, a technical indicator that had successfully predicted the 1987 market crash. It has recently reemerged on the financial media’s radar due to a serious of triggers that have been tripped, indicating the possibility of another Dow debacle. The problem, however, is that the Hindenburg has predicted a series of other imminent declines, most of which never came to pass. Still, it’s enough to spook a lot of investors, a large percentage of which seem to be somewhat of a superstitious lot.
It can go either way, as always, though the markets are currently responding faster and more furious to the bad noise. And with the 10,000 level staring out at the investor, it seems as good a focal point as any to see if a year of sideways begins to take a turn in a clear direction. If it’s towards the downside, you might want to prepare for the event with an effort towards balancing your virtual portfolio. Next week we’ll look at a variety of choices on the ETF menu that you might consider adding to your defensive playbook.
What the Periscope Sees
Each week, ETF Periscope scans Sabrient’s SectorCast-ETF Rankings in search of a few good plays. The Rankings are forward-looking in general, going out about 4-6 weeks. Sometimes I’ll reemphasize the most recent selections, with an eye towards allowing them to play out. That’s what’s happening here, as I highlight both the Bull and Bear picks for an additional week. Chart references are updated as appropriate in order to bring everything up to speed.
In the Bull camp, QTEC (First Trust NASDAQ-100 Technology Sector Index Fund) sits within the top 10% of the Rankings. It is an equity fund which invests in stocks of companies operating in the Technology Sector and seeks to replicate the NASDAQ-100 Technology Sector Index by investing in stocks of companies listed in this Index in proportion to their weighting in the Index.
Looking at QTEC’s chart, we see it has fallen further below its 50-day and 200-day moving average this past week. Still, it remains about a dollar above what has served as strong support all year, and its Moving Average Convergence-Divergence (MACD) indicates an upward trend could be in the making.
A second selection from the Bovine camp is KBE (SPDR KBW Bank ETF), higher up and still within the top 5% of the rankings. This exchange-traded fund invests in stocks of companies operating in the Banking Industry, including national money center banks and regional banking institutions. The fund replicates the KBW Bank Index (Ticker: BKX) by investing in the companies of that Index in approximately the same proportion and, before expenses, seeks to closely match the returns and characteristics of that Index.
A glance at KBE’s chart reveals that for the second time in the last week, it bounced off a support level that has steadily served as the low point for the year. While it remains well below both its 50-day and 200-day MA, it does have significant upside, even if it just reverts back to its mean for the year. Fundamentally, the Rankings indicate strength, but that being said, a tight stop on this play would be prudent.
From out of the Bear camp, about two-thirds of the way down in the SectorCast-ETF Rankings, is IWP (iShares Russell Midcap Growth Index Fund), an exchange-traded equity index fund launched and managed by Barclays Global Fund Advisors. The fund invests in stocks of companies listed on the Russell Midcap Growth Index in proportion to their weightings in the index. The Russell Midcap Growth Index measures the performance of the mid-cap growth segment of the U.S. equity universe. The fund seeks to replicate the performance of Russell Midcap Growth Index.
IWP serves as a good proxy for the overall markets, and can be useful as a broad-based hedge against major negative market moves. You can buy slightly out-of-the-money put options a few months out, or short the ETF itself. Exactly how much downside “insurance” you choose to secure is a question for you to decide, reflecting your overall market bias as well as your risk-management strategies.
ETF Periscope
Full disclosure: The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”
Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results.
