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Courtesy of Daniel Sckolnik, ETF Periscope
“Concentrate your energies, your thoughts and your capital. The wise man puts all his eggs in one basket and watches the basket.” – Andrew Carnegie
Attention Wall Street shoppers. Fear has just entered the building.
After enjoying a relatively copasetic ride on the uptrend train these last two months, the markets were hit with a rather strong jolt to the Bear side. The Dow Jones Industrial Average (DJIA) ended Friday 166 points lower than it began, finding itself at 11,823. This past week was the Dow’s first stab at piercing the 12,000 level in about two and a half years, and it was a foray that ended in clear defeat.
Friday’s drop was the steepest since mid-November, and the only good news was that the Dow didn’t end the day at its low point, something you never really want to see before the weekend, unless, of course, you happen to be holding a Bearish position or two. The benchmark S&P 500 Index (SPX) also fared poorly on Friday, losing its own battle to penetrate the 1300 level and finding itself down over 23 points on the day, landing with a thud at 1276.
There are certainly a number of reasons that the markets headed south with the enthusiasm of a New York pensioner flying down to Florida for the winter. Both Ford and Amazon disappointed investors when they reported weaker-that-expected earnings late in the week. A falling level of confidence in the economy by the public, as expressed by December’s Thomson Reuters/University of Michigan’s Consumer Sentiment Index, seemed to catch the markets attention in the negative fashion that it often does. The announcement that the GDP rose in the fourth quarter failed to impress, especially since it, too, fell below the expectations of polled economists.
However, these sort of economic reports, even taken together, have been primarily shrugged off by the markets as of late. So what exactly has changed?
Perhaps it is the sense that something of significant concern might be transpiring in the regions of Northern Africa and the Middle East, specifically the political unrest in Tunisia and Egypt.
It is precisely these sort of regional concerns that really spook the markets.
Just look at last year’s Euro-zone panic, when the word “dominoes” was used with such a high degree of frequency to convey the expectations that Portugal, Ireland, Italy, Greece and Spain were about to topple over, one after the other, due to the depth of the sovereign debt problems that emerged.
The PIIGS have hardly gone away; they have merely been herded fairly quietly into a corner. But it was the recognition that the problem was possibly fundamental, not easily correctable, and that the problem could easily spread beyond regional boundaries. Some of the fear, in fact, seemed to come along with the realization that the term “regional boundaries” was a complete artifice, and that at a certain scale everything becomes global, and fast.
So the markets reacted with a shudder, as they often do, at the scent of the unknown. Oil and gold suddenly reversed their respective slides, and once more reflected investor’s passions for the commodities at precisely these moments of uncertainty. Meanwhile, the equity markets, which have arguably been waiting for an excuse to make a sizeable correction, may finally have found one.
So how can an investor survive the current state of flux, or even take advantage of it? Here’s a pair of ETFs that can be used either for the purpose of hedging or directional trading.
VXX. One way to play the volatility in the markets right now is via the ETN VXX (IPath S&P 500 VIX Short-Term Futures Exchange Traded Note). It more or less tracks the VIX, known as the “fear index.” If the markets are plunging, the VIX soars. If the markets are stable, the VIX drops. On Friday, the VIX shot up 24%, with VXX gaining over 8%.
You can use this ETN for insurance to protect your existing virtual portfolio, either by purchasing calls or going long on the ETN itself. Another choice is to use it to put on a pure directional play, depending which way you figure the wind will be blowing. If you figure the volatility in the markets to continue or to increase, go long this ETN. If you see a measure of increased stability in the markets, go short VXX.
EGPT. If you want to go directly to the source, there is an ETF that will allow you to bet directly on Egypt’s financial situation. EGPT (Egypt Index ETF) is a small-cap fund generally categorized as an emerging market ETF. It tracks Market Vectors Egypt Index and provides exposure to publicly traded companies primarily listed on an Egyptian exchange. It has dropped almost 20% since the beginning of the year, having crashed through both its 50-day and 200-day moving averages back on January 18th. Because it is lightly traded, it certainly should be considered carefully before adding to your virtual portfolio, either as a Bearish or Bullish position.
Even if you can’t directly impact the stability of the region where current upheaval seems to be holding sway, you can control the stability of your virtual portfolio. Taking a deep breath and a considered gesture is never a wasted motion.
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.
