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ETF Periscope: Revenge of the Ratings Agencies

Posted on the 19 December 2011 by Phil's Stock World @philstockworld

“There are three kinds of men. The one that learns by reading. The few who learn by observation. The rest of them have to pee on the electric fence for themselves. “ – -Will Rogers

ETF Periscope: Revenge of the Ratings Agencies
As the year fades into its final two weeks, it remains something of a coin-flip as to whether or not Wall Street ends the year in the red or the black.

Whether investors find themselves in an upbeat holiday mood, or if they instead assume the sour vestige of a Christmas Scrooge will likely be left up to the sentiment of buyers and sellers of Italian and Spanish debt.

Last week saw the equity market falter after a pair of previous winning weeks. The Dow Jones Industrial Average (DJIA) shed 2.6%; the benchmark S&P 500 Index (SPX) ended down 2.8%; and the laggard of the trio, the Nasdaq Composite Index (COMP), suffered a 3.5% loss.

As has been the case for most of the last four months, last week’s whims and whimsies of an erratic Europe market dictated which way investor sentiment blows. There seemed to be a recognition on Wall Street that the latest and final round of agreements, made at the European Union’s final summit of the year, might not actually solve the deep systematic ills of the euro-zone. This recognition may have forced investors to reconsider the recent round of buying that buoyed the market during the first couple of weeks in December.

The news that seemed to have the most impact on the market was the latest round of saber-rattling that Standard & Poor’s Ratings Service conducted, threatening to drop down by a notch the credit rating of no less than 15 of 17 of the euro-zone member nations. France seemed to be the country that stood to lose the most, however, due to its relatively high debt load.

S&P, it would not be hard to recall, is somewhat fresh off its return to relevance after garnering lots of press, and more than a fair degree of consternation, when it downgraded the United States government’s triple A rating back in August.

Wags may have inferred a certain level of payback had ensued after Congress began to investigate, though somewhat belatedly, S&P’s and Moody’s role in helping to crash the market in 2008 by virtue of their failure to rate home mortgage bonds with anything even remotely close to what could be considered any degree of accuracy.

Still, only a true cynic might consider that the rating agencies are locking in their power when they can. Never mind that Finch jumped into the fray last week as well, lowering its outlook on France to negative, which, in ratings-speak, suggests that there is slightly worse than an even-money bet that the euro-zone economic powerhouse will shed its AAA rating within the next two years.

The coming week should reveal the direction Wall Street shall end the year, as the auctions of both Italian and Spanish bonds will be closely followed to see if the “sale” made by EU leaders at last week’s summit will translate into anything resembling longer term investor confidence.

What the Periscope Sees

Last week, the VIX found itself darting below 25 for most of the week, well toward the low side of its trading range of the last four months. It has also dipped below its 200-day moving average.

This is somewhat unexpected, as the high level of uncertainty that has emanated out of Europe recently could have easily sent the “fear index” significantly higher, representing a rise in uncertainty.  Apparently, a lot of the fear of a EU break-up has been baked into the market already. Still, at it currently stands, the VIX remains at a good price as a potent hedge against a further stark drop in the equity markets.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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