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Courtesy of Daniel Sckolnik, ETF Periscope
“The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.” — Marcel Proust
The recent uptrend in the equity market has not only been due to some improved metrics on the domestic economy, but as well, to the vague promise that the euro-zone drama has inched its way towards some sort of resolution of the matter of a default by Greece.
This past Friday’s combination of EU news and the subsequent market reaction has, however, revealed once again that the uncertainty of the EU sovereign debt crisis is likely to remain as perhaps the most critical obstacle to Wall Street’s pursuit of a serious Bull Run.
Once again, investors grew spooked by the apparently never-ending drama referred broadly as the EU sovereign debt crisis, and they took the opportunity to lock in some profits from the impressive recent run-up in stock prices as a precautionary measure.
The deep fears of investors over the whole euro-zone debt crisis has been effectively calmed these last five weeks, a period that has seen both the S&P 500 Index (SPX) and the Nasdaq Composite Index (COMP) boast consecutive gains during those weeks. But Friday saw all three of the major indexes, including the blue-chip Dow Jones Industrial Average (DJIA), suffer their worst losses so far this year. And, while the drop was widely attributed to the euro-zone uncertainty, it was no doubt exacerbated by the University of Michigan/Thomson Reuters report that its consumer sentiment index had fallen from 75 to 72.5.
This one-two punch left the Dow down close to 90 points, dropping the index for a 0.5% loss on the week. Meanwhile, the SPX shed 9 points, falling to 1342. While it suffered a relatively small 0.2% drop, it is worth noting that this corresponds to resistance met at the benchmark index’s 1350 level. Technically speaking, this 1350 level may serve as a reflection of the battle line drawn between the success and failure of the current round of Greek debt negotiations.
Up until Friday, recent expectations were running fairly high that somehow, someway, the Greek government would muster the political will to sign off on the latest austerity demands required by a number of euro-zone finance ministers in exchange for a second bailout package. However, it became increasingly clear throughout Friday’s trading session that no firm commitment would be forthcoming from Athens, at least not during the course of the trading day.
There is an essential disconnect between the requirements of the euro-zone finance ministers for Greece to tighten its fiscal belt, and the actual citizens of that country, who are racing headlong into a recession that seems highly likely to worsen if austerity continues to trump growth. So, while Greece continues to stare into the face of a 19 billion dollar debt bill coming due on March 20, the Greek politicians must walk the fine line and high wire of somehow satisfying the demands made by its creditors who won’t fork over a shiny new loan unless strict conditions are met, and its citizenry, who have taken to the streets in protest of having to suffer increasingly harsh conditions.
It is a tight tightrope that needs to be kept taut, though all objective indicators would seem to point in the direction that some slack must be cut somewhere, somehow. It is a cat-and-mouse game, with some serious consequences resulting from how it will all end up being played out.
What the Periscope Sees
The VIX (Chicago Board Options Exchange Market Volatility Index) shot up by 11.6% on Friday, which gave the “fear index” its biggest jolt in about three months. Sitting at 20.79, it nevertheless remains at the low end of its recent six-month trading range. As such, and with the euro-zone sovereign debt crisis hardly resolved, using this explosive index as a hedge continues to make sense. The 11.6% jump clearly illustrates the value of the VIX as an excellent vehicle for hedging your portfolio.
If you are convinced that the EU drama has yet to be effectively baked into the price mix of the equity market, consider pairing up a trade on a VIX-based trading vehicle, such as the VXX (iPath S&P 500 VIX Short-Term Futures ETN), with the next Bullish trade you put on.
While most successful “pairs trades” obviously limit upside potential to a certain degree, adding this type of hedged play to the mix might just allow you to sleep a whole lot better at night, even if you happen to be having dreams of Italian espresso, French croissants, and arguing euro-politicos.
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.
