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ETF Periscope: Some Random Thoughts Down Wall Street

Posted on the 29 August 2011 by Phil's Stock World @philstockworld

ETF Periscope: Some Random Thoughts Down Wall Street

“If to do were as easy as to know what were good to do, chapels had been churches, and poor men’s cottage princes’ palaces. — William Shakespeare

ETF Periscope: Some Random Thoughts Down Wall Street
Bernanke came. Bernanke went. Bernanke will be back real soon.

If you were hoping that the Chairman of the Fed would restore a modicum of calm to the wild ride that has been Wall Street these last four weeks, you got your wish.

However, as in most things, it is a question of degree.

True, the Dow Jones Industrial Average (DJIA) pulled out of a month-long tailspin, breaking a consecutive string of four weeks of losses. The Dow ended the week at 11,284 for a five-session gain of 3.4%. It was joined by similar gains in the other major indexes, with the S&P 500 Index (SPX) landing at 1,176, up 4.7% for the week, and the Nasdaq Composite (COMP) soundly beating them both, impressively rising 5.9% over five sessions.

Normally, that kind of week would be a major cause of celebration. But keeping things in perspective, admittedly a tricky thing to do given the extreme volatility of the recent market activity, the Dow recovered only 4% of its recent 16% correction. So really, the past week could be viewed as the start of a Bullish push upwards, or it might just as easily be a mere stop on the way to a continued round of wild 300-500 point swings in either direction, of which there have been no less than seven in the last three weeks alone.

If you take a quick look at how last week unfolded, it would seem to indicate that, for the most part, anyway, the equity markets were anticipating something of a positive nature from Bernanke’s turn at the podium at Jackson Hole. When Ben finally did pontificate on Friday, Wall Street seemed to respond with a collective “Huh?” and promptly shed about 200 points. It did recover fairly quickly, however, and ended the day in the green by 134 points.

So, by most interpretations, investors gave a thumbs-up to the Fed Head for what he had to say.

But what did he actually say? Not much, beyond announcing that Congress was dysfunctional, the economy was improving, though not as fast as he’d like, and maybe, just maybe, he might still toss the market a bone when he returns to the podium at next month’s regularly scheduled Fed meeting.

So, in a kind of incestuous relationship, the expectation of Bernanke’s comments being positive led Wall Street higher, which, in turn, made it less likely he would actually need to say anything much of consequence.

What exactly did Wall Street find so inspiring, anyway, from Ben’s little speech? It was, really, pretty much just a variation on the typical Fed theme of late, “all is well, kinda sorta.”

Why did the equity markets move up in response to so little?

Was it the gentle insinuation that some form of QE3 might be forthcoming after all? The confidence conveyed by Bernanke as he assured his audience that really, truly, the Fed had more arrows in its quiver, if he ever actually did need to fire them?

Or perhaps it was his promise to extend the traveling Fed show from one to two days for his next scheduled appearance in September, and the mere thought of seeing Bernanke trying to say even less over a longer period put Wall Street in a sweet mood.

More likely, investors suddenly felt like prices of stocks were starting to look attractive again, creating a consensus opinion that the current correction had bottomed out, at least for now.

Other events that filled out the week didn’t seem to bother the market too much. The Commerce Department’s announcement that the Gross Domestic Product (GNP) for Q2 was being revised downward from last week’s report didn’t seem to spook investors. Neither did the lack of any clear resolution by the European Union’s leaders regarding the growing sovereign debt crisis. Nor did the remaining unimpressive earnings reports that continued to trickle out as the Q2 reporting season wraps itself up.

Collectively, there easily was enough negative news to make a nervous market even more skittish. Yet that didn’t happen.

So has the tide really been turned, at least for the time being? Or is last week more of a Bearish head-fake?

One clue might be found by looking at the VIX, which is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index and consists of a wide range of S&P 500 index options. The VIX, commonly referred to as the “investor fear gauge,” has calmed down a bit, dropping back to the mid 30’s after spending a lot of time recently in the mid 40’s. (The VIX goes down as fear subsides, and rises in response to uncertainty.)

However, the fact is that the VIX, by its nature as a volatility measure, can shoot up faster than a dumb junkie, so in many ways it may be more usefully regarded as a thermometer for the market’s current temperature than a clear leading-trend indicator.

One of the more unusual things to play out was the mid-week announcement by Apple’s Steve Jobs that he was resigning his position as CEO. As would be expected, the announcement brought a fast drop in after hours trading, but the stock ended the week up 5% anyway. Not really surprising, if you consider that Jobs’ health might have given some potential investors pause, fearing what would happen to the stock if he passed. The orderly transfer of power probably served as a green light for those who needed another reason to believe in the tech powerhouse, as if its traditional September power move wasn’t adequate reason enough.

Another interesting occurrence was how gold traversed the price scale. After a sizable mid-week sell off, it would not have been unreasonable to think that the inevitable descent from its recent parabolic run-up was finally at hand. Didn’t prove to be the case, however, as the shiny metal recovered much of its lost ground by the end of the week. What made it particularly interesting was that Friday found gold up substantially, even as the major indexes all rose significantly. The inverse correlation that often can be seen between gold and the equity markets just didn’t hold up this time.

There are, by a number of measures, some good deals out there to be had. If you find yourself drawn in by the sweet siren song of “fair” prices on those stocks or ETFs that you’ve had your eye on for a while, it might not be a bad time to test the waters.

Just be aware that you can never really see the undertow just below the surface of the waves, and that’s where the danger lies. A deftly placed hedge of a leveraged inverse index ETF might be a smart play to take some risk out of that dip in the water.

And if you happen to see Big Ben surfing by atop a passing wave, you might ask him what he really meant when he said whatever it was that he said last week at Jackson Hole.

What the Periscope Sees

This week, Sabrient has both Basic Materials and Energy near the top of its SectorCast ETF rankings, so a couple of ETF possibilities worth considering include PXI (PowerShares Dynamic Energy Sector Portfolio) from the Energy sector and IYM (iShares Dow Jones U.S. Basic Materials Sector Index Fund) from the Basic Materials sector. Both are currently rated as strong buys by Sabrient, with PXI rated “Most Attractive” and IYM rated “Attractive,” one notch below.

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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