Ben Bernanke is back for yet another close-up this week, and in spite of a certain degree of dissent amongst the Fed ranks, chances are better than even-money that the press conference that follows this week’s gathering of the Federal Open Market Committee Meeting (FOMC) will find Big Ben indicating that the super low interest rates, strong stimulus tack will remain in place.
After all, why would the head of the Fed try to upset a relatively positive applecart? Indeed, the Fed’s business is the economy, and, relatively speaking at least, business is good.
Wall Street is thriving at the moment, as indicated by the performance over the last month of the major indices. The Dow Jones Industrial Average (DJIA) has ended in the black no less than 13 out of the last 15 sessions. Not only has it hit record highs, it is on a fierce four-week winning streak. As of last week, the Dow was up over 11% year-to-date. Close behind is the benchmark S&P 500 Index (SPX), up over 9% YTD. The tech-laden NASDAQ Index (COMP) trails the trio, and is up over 7% YTD.
The economy seems to be showing sustained signs of life, in spite of the stubbornly high rate of unemployment. Economic news last week included slightly better-than-expected retail sales numbers, which was apparently just enough to confirm for investors that the recent Bullish data, showing incremental though limited growth in the arenas of consumption, U.S. exports and private sector investment, does indeed seem to indicate a trend.
So all’s well in investorland?
Perhaps, but one doesn’t last in investorland for long unless one has learned to be prepared for the market’s frequent and inevitable surprises.
Hedges, in other words, should be considered anytime Big Ben approaches the microphone, whether because of his utterances or of those made by other members of his club.
So, in positioning yourself for the possibility that the Fed hawks will try to make the voice of dissent heard through subversive whispers, and in anticipation of the possible sharp and sudden downward dive in the market that would accompany such chatter, the addition of some volatility insurance would be considered prudent.
For all its flaws, and there are indeed many, the VXX (S&P 500 VIX Short-Term Futures ETN) still manages to serve as a functional hedge against sudden shifts in the Wall Street headwinds.
A VIX derivative, VXX tracks the S&P 500 VIX Short-Term Futures Index Total Return. Though VXX is not recommended here as a long-term hedge due to the intrinsic limitations of its structure, it does share some of the attributes of explosiveness of VIX futures, meaning that when the market shifts fast in either direction the VXX moves in a similar, amplified fashion. Bottom line: A sudden market drop would result in a big gain for a long VXX position. Remember, the VXX generally goes up as the market goes down, and vice versa.What the Periscope Sees
The Sabrient SectorCast ETF Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis. And in terms of the Rankings, the trend continues with Technology Sector firmly ensconced atop the leaderboard.
What follows is an updated list of the year’s top performing Technology Sector ETFs year-to-date, as of the second week of March:
SOXX — iShares PHLX SOX Semiconductor Sector Index Fund, +13.43%
IGV — iShares S&P GSTI Software Index Fund, +11.14%
FDN — First Trust Dow Jones Internet Index Fund, +10.62%
PSCT — Power Shares S&P 500 SmallCap Information Tech Portfolio, +9.94%
FXL — First Trust Technology AlphaDEX Fund, +9.50%
SMH — Market Vectors Semiconductor ETF, +9.46%
QTEC — First Trust NASDAQ-100 Technology Sector Index Fund, +8.70%
Prefer to use options? Consider buying call options as an effective tool for leveraging your portfolio’s funds. The May 2013 expiration calls, two or three strikes out-of-the-money, remain adequate for this purpose.
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.