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ETF Periscope: 1000 Points and 10 Days Later

Posted on the 17 October 2011 by Phil's Stock World @philstockworld

Courtesy of Daniel Sckolnik, ETF Periscope

ETF Periscope: 1000 Points and 10 Days Later

You’ve got to be very careful if you don’t know where you are going, because you might not get there.”  –  Yogi Berra

ETF Periscope: 1000 Points and 10 Days Later
The Dow has just come off an impressive two-week run. The question now is, was that just a sprint that will leave investors winded, or is a breakthrough of a 10-week sideways trend about to occur?

The numbers over the last week were admittedly on the impressive side. The Dow Jones Industrial Average (DJIA) ended the week 4.9% higher, making it the third week in a row that it posted an upside movement. Meanwhile, the S&P 500 Index (SPX) gained over 6% during the same period, giving the benchmark index its single largest weekly gain in over two years. Finally, not to be outdone, the Nasdaq Composite Index (COMP) topped them both, ending the week up a stunning 7.6%.

For investors, one of the most important facets of these results, at least psychologically speaking, may have been the fact that the Dow’s really good week ended by putting the Index in the black for the year, though just barely.

It might be a portent of things to come, or it may simply prove to be no more than a tease.

There are multiple reasons to doubt a sustained upward move, however.  First off, U. S. consumer sentiment took an unexpected hit according to the Thomson Reuters/University of Michigan Index, dropping from September’s 59.4 down to 57.5 in October. One of the key reasons behind the dour mood of those surveyed was concern about declining income. There have been numerous reports in the mainstream media of late trumpeting the fact that inflation-adjusted income has dropped by nearly 10% over the last four years. There has also been a substantial drop in U.S. port traffic over the last few months, which might indicate that retailers aren’t being overly optimistic about the Christmas shopping season. Ultimately, the U.S. economy is based around consumers, and if they are feeling like the recession really hasn’t gone away, even the ones that have the ability to spend may be hesitant to do so.

A second reason that the recent sideways trend may be tested, but not broken, is the ongoing concern regarding the European Union’s debt/banking crisis. The EU crisis seems to continue to alternate between moments of imminent disaster and heady resolution. Most recently, this weekend heard promises from Germany and France that a multi-trillion dollar program, geared towards addressing the needs and key concerns of the EU member-nations, was in the works.

A multi-trillion dollar program.  Impressive.

Who knew there was that much spare cash lying around the Continent, and why hadn’t someone mentioned it a little earlier? It might have saved investors from some of the whiplash experienced by the hyper volatile markets these last three months.

Of course, nothing is even close to finalized, nor will anything really be until the G-20 summit in Cannes occurs in a few more weeks. And with those kind of numbers being bandied around, the chance for variations on the theme not only wouldn’t be unlikely, but rather a sure thing.

So the big push up that the market has experienced these last two weeks, primarily coming from strong numbers from the Tech sector in the form of Google and Apple, as well as a certain calming that occurred due to harmonious noise from the EU’s key players, may continue to gain traction. If the upcoming government reports indicate any signs of life in the economy, and the next round of earnings reports provide positive fodder for investors, then Wall Street could ride some momentum into the fall.

However, if emerging news slants towards the darker side, then the sideways trend that the market has been in for the last several months will hold, and equities will dive down 5% back to the midpoint of the trend, or 10% down to the trends recent support levels.

What the Periscope Sees

With the VIX (the Chicago Board Options Exchange Market Volatility Index) at its lowest point in over two months, it might be a reasonably good time to use it as a form of insurance to offset some Bullish trades. VXX (S&P 500 VIX Short-Term Futures ETN) can be used for this purpose. Keep in mind that VXX, while reflecting the VIX generally, does not mirror it exactly. However, like the VIX, the VXX does tend to move faster and bigger in response to bad news than it does to good news. (The VIX generally moves up as the equity market moves down, and vice-versa.) So, as a hedge, treat the VXX to a certain degree as if it were a slightly leveraged vehicle.

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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