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ETF Periscope: Wall Street Not Ready to Kick the Volatility Habit Any Time Soon

Posted on the 06 September 2011 by Phil's Stock World @philstockworld

ETF Periscope: Wall Street Not Ready to Kick the Volatility Habit Any Time Soon

“When written in Chinese, the word “crisis” is composed of two characters. One represents danger and the other represents opportunity.”  –  John F. Kennedy

ETF Periscope: Wall Street Not Ready to Kick the Volatility Habit Any Time Soon
Is a September swoon in the cards? It all depends on how Wall Street plays its next hand, which just may have one too many jokers in it.

Two weeks back, the market seemed to shift off its month-long downswing, in anticipation of Ben Bernanke’s speech at Jackson Hole. Maybe it was precisely due to the fact that the Dow Jones Industrial Average (DJIA) had gained over 300 points in the four sessions leading up to his speech that he felt no compunction to toss Wall Street a bone.

He did, however, remind all and everyone of the upcoming regularly scheduled Federal Open Market Committee (FOMC) meeting September 21, mentioning that it would include an extended performance lasting a second day.

Presumably, the reminder was given for the purpose of indicating that something of interest would be said at that time, even if nothing new had been offered up during his actual speech.

The market managed to read good things into the speech anyway, and proceeded to reward Ben’s appearance with another 300-point rise in the Dow over the subsequent three sessions.

Then, something shifted.

In response to some really sour economic data out of Washington, along with the lingering fear of the EU debt crisis, the equity market shed its week’s winnings, and then some.

Exactly the reaction one would expect when the Labor Department reports the sum total of jobs created in August amounts to zero.

As in, well, zero.

You’d have to go all the way back to September of 2010 to find a worse number, which, obviously, was a net loss. Not only that, but, in what has become a recent and disconcerting trend, June and July’s hiring figures were revised lower. Downward revisions have been happening a lot lately, particularly discouraging when the initial numbers are already weak.

One particular joker in the deck, one that has a particularly strong potential to put the market on tilt, is the fact that a number of leading U.S. banks are currently being sued by the government for fraud, with the focus being on the packaging and selling of mortgage-based securities. The Federal Housing Finance Agency (FHFA) ended up suing a total of 17 financial institutions, including most of the big boys, namely JP Morgan, Goldman Sachs, Bank of America, and Citigroup. The news came out Friday, and it’s a safe bet that the full impact of that event has yet to be absorbed by the market.

And to think that the financial sector was actually starting to lure investors back in. That allure may now disappear quicker than paper profits in a Ponzi scheme.

Another joker in the deck is the President’s speech coming up on Thursday, which is touted as being all about job creation. If he goes “big” in terms of proposals it could jolt the market, which hears just about everything from Obama’s mouth as “more regulations, more taxes,”regardless of what’s actually being said.

Quite a phenomenon, if you actually consider it.

So early September could be on course for a strong downtrend, one that could conceivably run into Bernanke and the Fed later in the month. If that happens, it is possible that all bets are off, and Ben may just have to go all in and raise one more round of Quantitative Easing.

What the Periscope Sees

This week, Sabrient has Health Care near the top of its SectorCast ETF rankings, so one ETF worth considering is IYH (iShares Dow Jones U.S. Healthcare Sector Index Fund), which Sabrient rates “Attractive.”  Because of the potential impact of the FHFA suit, I am pairing FAS (Daily Financial Bull 3x Shares), a leveraged ETF that tracks the Russell 1000 Financial Services Index, with IYH.

Worth considering, then, is to go long IYH, go short FAS. Keep them together as a hedged play.

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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