Business Magazine

ETF Periscope: The Bernanke Man Cometh, Part 2

Posted on the 02 May 2011 by Phil's Stock World @philstockworld

Reminder: Sabrient is available to chat with Members, comments are found below each post.

Courtesy of Daniel Sckolnik of ETF Periscope

“Liking money like I like it, is nothing less than mysticism. Money is a glory.” — Salvador Dali

ETF Periscope:  The Bernanke Man Cometh, Part 2
Man, there’s a lot of Bull going on out there in EquityLand.

You might say that Ben Bernanke’s first press conference following a Fed announcement was a major hit. Maybe he should think about taking his act to Broadway. And what an act it was. With the straightest of faces, he managed to shrug off the fact of inflation as if it was hardly a thought worthy of an intelligent person’s consideration.

The applause that the equity markets showered on Ben lasted right on through the week. The Dow Jones Industrial Average (DJIA) steadily rose more than 200 points over three days, landing light as a feather at 12,810. As of Friday it stood at its three-year high. It floated above the 12,500 mark with little effort, and barring some serious disruption in the Force, will be testing 13,000 over the next few market days.

But the Bull market might soon find a nemesis in the old market adage, “sell in May and go away.” Or will that old chestnut stand up to the mighty charge of the current Bull Run?

Over the course of the last four years, during the May-through-December period, the Dow has lost a combined 2500 points. Granted, that covers the period that includes the whole little  “mortgage/credit” fiasco that just about took down the global financial markets, but it also includes the recent record-breaking Bull Run that’s been going on over the course of the last two years. Should 2011 really be considered an exception, isolated from the rest of that equation? Not really. It’s part and parcel of the tail-end of a five-year time cycle. It’s as linked to that same time frame as a pair of Siamese twins would be. Separate at your own risk.  

So it “may” just be that May will serve as a fulcrum, when the loose credit that has helped direct the money stream towards equities meets the underside of the country’s economic realities. Which are? Bad housing numbers, bad unemployment stats, and sharply rising prices in the basics: food and gas. Really, how many times can the average Joe fill up a tank at 70 bucks a pop, or a pair of grocery bags at 100 bucks a shot, and still have any remaining discretionary income to spend on anything else?

It’s a sign of the times, which one may or may not chose to overlook, that when McDonald’s, in a national hiring binge to cover its summer needs, advertised for 50,000 jobs, they got more than 1,000,000 applications. At minimum wage, no less. One would hope the successful applicants have access to public transportation.

So, while it might not be necessary to “sell in May and go away,” it might be wise to slap a downward hedge onto your Bullish leaning portfolio, just in case.

What the Periscope Sees

About that adage, “sell in May, then go away”? It’s not actually very precise, in terms of specifying exactly when in May to sell. May 1st? Or perhaps it refers to the last trading day of the month?

OK, adages are, by nature, pretty general creatures, so let’s just roll with the vague concept of “some time in May”. You get to pick your spot. Also, should we assume that the “sell” part of the equation means to sell some existing long position? Or could it be meant to sell something short, and then go away and hope for the best? Pretty arbitrary stuff, if you think about it.

Well. In any event, assuming that you want to continue to ride the existing upward trend, here are a couple of ETFs to check out. Both are, as mentioned, offered as upside plays.

One of the tools I use in evaluating ETFs is Sabrient’s ETFCast Rankings. They consist of more than 300 ETFs (exchange-traded funds) that are ranked and scored via 19 of Sabrient’s proprietary analytics, that, when taken together, offer a forward-looking take on the markets.

I generally scan down the current list of the top ETFs, choosing no more than one per sector, in deference to the concept of diversification. I’ll also look at the ETF’s chart, taking note of certain reference points, including support and resistance levels and simple moving averages.

For starters, consider IYM (iShares Dow Jones U.S. Basic Materials Sector Index Fund), a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Basic Materials Index. The Index measures the performance of the basic materials sector of the U.S. equity market, and includes companies in the following sectors: chemicals, forestry and paper, industrial materials (such as steel, metals and coal), and mining.

Technically speaking, IYM is well above both its 50-day and 200-day moving average, and is testing its all-time high, dating back to June of 2008.

Also consider IYG (iShares Dow Jones U.S. Financial Services Index Fund), a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. financial services stocks as represented by the Dow Jones U.S. Financial Services Index. The fund’s major holdings include Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, U.S. Bancorp, American Express, Bank of New York Mellon Corp, VISA, and PNC Financial Services Group.

On the technical side, IYG is currently situated between its 50-day and 200-day MA.  IYG has been trending sideways for 2011, and, as over the past two weeks, has been bouncing off the year’s support level of $56.60.

Along with these, one might also consider adding, for the purpose of securing a hedge, one of several ETNs that track the VIX. Why? The VIX (Chicago Board Options Exchange Market Volatility Index) closed on Friday at $14.75, close to its 4-year low. The VIX, commonly referred to as the “fear index,” is by its very nature hyper-responsive to the moods of the markets. When it is low, it means that implied volatility is down. When it goes up, it means volatility levels are up.

It is hard to see these levels fall much lower in the short term. The nature of the VIX is that it makes extreme moves upwards (sometimes up to 20% in a single day, depending on how many Black Swans are flittering about) in response to bad news, but moves far less violently to the downside in response to good news. Perhaps an outbreak of world peace would send the VIX sinking, but if that were the case, then who would complain about a little portfolio loss? Other than that, it currently may be considered as one of the best defensive hedges out there.

Here, then, are three ETNs that can be used as hedging tools. They are all based upon the VIX, but are gauged to follow the futures at various contract time periods.

First, there’s VXX, (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the VIX. It offers exposure to VIX futures contracts and reflects the implied volatility of the S&P 500 Index.

Next, there’s VXZ (iPath S&P 500 VIX Mid-Term Futures ETN). This tracks the S&P 500 Mid-Term Futures Index, which offers exposure to slightly longer term VIX futures contracts then the VXX.

Finally, if you want to really leverage your hedge, take a look at
TVIX (Daily 2x VIX Short-Term ETN). It tracks the S&P 500 VIX Short-Term Futures Index. A leveraged ETN, TVIX provides 200% vs. a regular, non-leveraged ETN. Since it is leveraged, it will potentially double your profits if the trade goes your way. If not, beware, as you can also double your losses if the trade gets away from you.

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.

 

“Liking money like I like it, is nothing less than mysticism. Money is a glory.”– Salvador Dali

Man, there’s a lot of Bull going on out there in EquityLand.

You might say that Ben Bernanke’s first press conference following a Fed announcement was a major hit. Maybe he should think about taking his act to Broadway. And what an act it was. With the straightest of faces, he managed to shrug off the fact of inflation as if it was hardly a thought worthy of an intelligent person’s consideration.

The applause that the equity markets showered on Ben lasted right on through the week. The Dow Jones Industrial Average (DJIA) steadily rose more than 200 points over three days, landing light as a feather at 12,810. As of Friday it stood at its three-year high. It floated above the 12,500 mark with little effort, and barring some serious disruption in the Force, will be testing 13,000 over the next few market days.

But the Bull market might soon find a nemesis in the old market adage, “sell in May and go away.” Or will that old chestnut stand up to the mighty charge of the current Bull Run?

Over the course of the last four years, during the May-through-December period, the Dow has lost a combined 2500 points. Granted, that covers the period that includes the whole little“mortgage/credit” fiasco that just about took down the global financial markets, but it also includes the recent record-breaking Bull Run that’s been going on over the course of the last two years. Should 2011 really be considered an exception, isolated from the rest of that equation? Not really. It’s part and parcel of the tail-end of a five-year time cycle. It’s as linked to that same time frame as a pair of Siamese twins would be. Separate at your own risk.

So it “may” just be that May will serve as a fulcrum, when the loose credit that has helped direct the money stream towards equities meets the underside of the country’s economic realities. Which are? Bad housing numbers, bad unemployment stats, and sharply rising prices in the basics: food and gas. Really, how many times can the average Joe fill up a tank at 70 bucks a pop, or a pair of grocery bags at 100 bucks a shot, and still have any remaining discretionary income to spend on anything else?

It’s a sign of the times, which one may or may not chose to overlook, that when McDonald’s, in a national hiring binge to cover its summer needs, advertised for 50,000 jobs, they got more than 1,000,000 applications. At minimum wage, no less. One would hope the successful applicants have access to public transportation.

So, while it might not be necessary to “sell in May and go away,” it might be wise to slap a downward hedge onto your Bullish leaning portfolio, just in case.

What the Periscope Sees

About that adage, “sell in May, then go away”? It’s not actually very precise, in terms of specifying exactly when in May to sell. May 1st? Or perhaps it refers to the last trading day of the month?

OK, adages are, by nature, pretty general creatures, so let’s just roll with the vague concept of “some time in May”. You get to pick your spot. Also, should we assume that the “sell” part of the equation means to sell some existing long position? Or could it be meant to sell something short, and then go away and hope for the best? Pretty arbitrary stuff, if you think about it.

Well. In any event, assuming that you want to continue to ride the existing upward trend, here are a couple of ETFs to check out. Both are, as mentioned, offered as upside plays.

One of the tools I use in evaluating ETFs is Sabrient’s ETFCast Rankings. They consist of more than 300 ETFs (exchange-traded funds) that are ranked and scored via 19 of Sabrient’s proprietary analytics, that, when taken together, offer a forward-looking take on the markets.

I generally scan down the current list of the top ETFs, choosing no more than one per sector, in deference to the concept of diversification. I’ll also look at the ETF’s chart, taking note of certain reference points, including support and resistance levels and simple moving averages.

For starters, consider IYM (iShares Dow Jones U.S. Basic Materials Sector Index Fund), a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Basic Materials Index. The Index measures the performance of the basic materials sector of the U.S. equity market, and includes companies in the following sectors: chemicals, forestry and paper, industrial materials (such as steel, metals and coal), and mining.

Technically speaking, IYM is well above both its 50-day and 200-day moving average, and is testing its all-time high, dating back to June of 2008.

Also consider IYG (iShares Dow Jones U.S. Financial Services Index Fund), a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of U.S. financial services stocks as represented by the Dow Jones U.S. Financial Services Index. The fund’s major holdings include Bank of America, JP Morgan Chase, Wells Fargo, Citigroup, Goldman Sachs, U.S. Bancorp, American Express, Bank of New York Mellon Corp, VISA, and PNC Financial Services Group.

On the technical side, IYG is currently situated between its 50-day and 200-day MA.IYG has been trending sideways for 2011, and, as over the past two weeks, has been bouncing off the year’s support level of $56.60.

Along with these, one might also consider adding, for the purpose of securing a hedge, one of several ETNs that track the VIX. Why? The VIX (Chicago Board Options Exchange Market Volatility Index) closed on Friday at $14.75, close to its 4-year low. The VIX, commonly referred to as the “fear index,” is by its very nature hyper-responsive to the moods of the markets. When it is low, it means that implied volatility is down. When it goes up, it means volatility levels are up.

It is hard to see these levels fall much lower in the short term. The nature of the VIX is that it makes extreme moves upwards (sometimes up to 20% in a single day, depending on how many Black Swans are flittering about) in response to bad news, but moves far less violently to the downside in response to good news. Perhaps an outbreak of world peace would send the VIX sinking, but if that were the case, then who would complain about a little portfolio loss? Other than that, it currently may be considered as one of the best defensive hedges out there.

Here, then, are three ETNs that can be used as hedging tools. They are all based upon the VIX, but are gauged to follow the futures at various contract time periods.

 

First, there’s VXX, (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the VIX. It offers exposure to VIX futures contracts and reflects the implied volatility of the S&P 500 Index.

Next, there’s VXZ (iPath S&P 500 VIX Mid-Term Futures ETN). This tracks the S&P 500 Mid-Term Futures Index, which offers exposure to slightly longer term VIX futures contracts then the VXX.

Finally, if you want to really leverage your hedge, take a look at

TVIX (Daily 2x VIX Short-Term ETN). It tracks the S&P 500 VIX Short-Term Futures Index. A leveraged ETN, TVIX provides 200% vs. a regular, non-leveraged ETN. Since it is leveraged, it will potentially double your profits if the trade goes your way. If not, beware, as you can also double your losses if the trade gets away from you.

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.

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