29
Nov
2010

ETF Periscope: An Ostrich Walks Into a Bar and Says “Ouch”

An Ostsrich Walks Into a Bar and Says "Ouch"

by Daniel Sckolnik of ETF Periscope

“I have always been regretting that I was not as wise as the day I was born.” ~Henry David Thoreau

We’re not in Kansas any more. More like Madrid. Or perhaps even Pyongyang.

After several months of marching to a primarily up-trending beat based around some pretty good third quarter U.S. corporate earnings and generally decent national economic reports, the markets seem to be getting a lot more skittish.

It doesn’t take a lot of figuring to see why higher levels of uncertainty are permeating the markets. All it takes is a quick read of the news to recognize that unnerving events are unfolding in the wider world. On Tuesday, the benchmark S&P 500 index fell 1.4%, its largest drop of the week, on the scary news that fighting occurred between the two Koreas. Asian currencies also reverberated with losses as a result of the mounting tensions. The S&P 500 ended the week down almost 1%, which put it about 3% below the two-year high that it hit on Nov. 5.

Bickering countries with nuclear capabilities and deep grudges seem to have that effect on the markets, for some odd reason or another. 

As if that wasn’t enough to spook investors, the growing media focus on the sovereign-debt crisis of the European Union’s weaker members is starting to gain mass. The word “contagion” is being bandied about with greater frequency than at any time since last year’s H1N1 concerns. The EU’s bourses posted their largest losses in over two months in response to the perception that Ireland, Portugal and Spain are situated on increasingly unsettled ground in terms of their abilities to repay their debts. This concern was highlighted in Ireland, where S&P lowered the Anglo Irish Bank’s ratings to junk level, as well as lowering the ratings of several other Irish banks. Moody’s Investors Service also placed Anglo Irish Bank “under review.”

The dollar, as would be expected in such times of international uncertainty, gained rather nicely, 2.4%, giving it a three-week winning streak. Measured against the basket of currencies consisting of the euro, the yen, the pound, the Canadian dollar, the Swiss franc and Swedish krona, it gained the most in over three months.

Other pieces of the economic puzzle offered contrasting levels of sentiment. General Motors (GM) offered up its highly awaited IPO, and managed to convince the public to cough up a staggering 23.1 billion dollars for its new public offering. Commodities, on the other hand, seemed to drop on the speculation that China, which has had an apparently insatiable appetite for all things mined and farmed, might cool its lust by increasing borrowing costs.

This week also saw an almost mirror-image of what occurred last week in the VIX, when it dropped about 20% to hit a six-month low right around 18. For the VIX, a widely used measure of market risk and often referred to as the "investor fear gauge," the lower the level, the more stable the markets. It closed a bit over 18 on Monday, but then shot up to over 22 by the end of Friday, the higher level reflecting growing concerns of investors in general. It seems as if fear, or at the very least, uncertainty, can be sensed by those that participate in the markets.

Here’s the question for the week: Will Black Friday’s report, which will be read like tea leaves to divine the state of consumer enthusiasm, offset or augment the events occurring on the geo-economic and political stage? This week will likely set the tone for how the rest of the year’s market numbers will unfold.

And it might be time for investors who focus primarily on the U.S. equity markets to pull their collective heads from out of their ostrich holes and glance around at the bigger picture, and adjust their portfolios accordingly.

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.

ETF Periscope
daniel / Tag: Ireland, Portugal, S&P 500, Spain, VIX /