01
Aug
2011

ETF Periscope: A Perfect Storm of Foolishness

ETF Periscope: A Perfect Storm of Foolishness

by Daniel Sckolnik of ETF Persicope

“A rich man is nothing but a poor man with money.” -- W.C. Fields

It is easy to regard the current debate on the matter of raising the debt ceiling as something of an exercise in absurdist comedy.

The problem with that conceit, however, is that the situation isn’t really very funny at all.

And though it would be a truly magnificent absurdity to contemplate, it is highly unlikely that some version of the Marx Brothers breaking out into a satirical song and dance in the halls of Congress will manifest, denying us all, at the very least, a good laugh at the ineptitude of the current legislators in D.C.

It seems likely that some form of compromise will be reached, mainly due to the fact that, in spite of all the commotion arising form the political theater known as Washington, the real power players recognize that defaulting on the national debt and getting dinged a notch or two on our credit rating is not really an exercise in intelligence.

So, what can be expected at deadline is for some sort of deal to be reached, a deal that will undoubtedly prove to be of an unsatisfying nature to all concerned.

That, in turn, most probably will be followed by a strong “relief rally.”

It remains to be seen if any relief rally will undo the damage done to the equity markets last week, a week that left both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) with a run of five straight down sessions, with Friday capping off the worst week that both key benchmarks had in over a year.

The SPX ended down over 50 points for a 3.9 % loss, while the Dow ended down 4% for the week, shedding over 500 points. Worth noting is the fact that the SPX ended at 1,292, below the psychologically important mark of 1,300, a level that has proven to serve as strong resistance on assorted occasions throughout 2011.

If there is indeed a relief rally, it may not be a party that is celebrated for very long. That’s because investors will realize that, once the debt ceiling issue has been addressed, plenty of additional causes for concern remain.

If you’re wondering what some of those issues might be, consider a pair of potential problems that surfaced last week that, when taken together, offer a sharp glance into the state of the current economy.

The Commerce Department put a dark punctuation at the end of a negative week when it announced that the GDP landed south of many economists predictions, posting a very weak 1.3% growth in the second quarter. Even worse was the related news that the first quarter GDP was revised substantially, going from 1.9% down to an anemic 0.4%.

Downward revisions are never a good thing, because, among other reasons, it often leaves the cynical-minded wondering if the blunder contained elements of a manipulative nature.

The second significant problem was a bit broader in scope, and had to do with many of the second quarter corporate earnings reports that were announced last week. In many cases the numbers left a lot to be desired, and investors jerked their knees in response.

If enough of the remaining earnings reports continue to disappoint, then the fundamental weakness of the current recovery will begin to rear its large, Bearish head.

It may come to investors attention that one of the reasons the last few earnings seasons have reported, on the whole, positive numbers could be attributed to the fact that, to some degree, bottom-line growth was being compared to extremely weak numbers that were the result of an earlier, floundering economy. It must be noted that when an economy emerges from a recession, the bar is set at a relatively low level.

The current spate of reports could be more indicative of the true nature of the economy. As always, time will tell, but in the meantime the tea leaves will certainly get read.

In any event, momentum from a relief rally, should that occur, might get snagged on a tripwire of weak economic reports and poor earnings as the numbers percolate up throughout the coming week.

Of course, one can always hope that at least some element of comedy will emerge from the political battlefield, giving investors at least a good laugh, if not any true relief.

What the Periscope Sees

Timing the markets can often be considered a bit of a fool’s game. However, if an anticipated relief rally does occur, it might serve as a fortuitous time to purchase some downward hedge insurance for your portfolio.

In my search for a clearer read on the markets, I often reference Sabrient’s ETFCast Rankings, which consist of over 300 exchange-traded funds.  The ETFs are ranked and scored via nineteen of Sabrient’s proprietary analytics that, when taken together, offer a forward-looking take on the markets.

In considering this week’s Rankings, I scoured the low end of the list for weak sectors that might serve as good shorting opportunities, thereby serving as downside hedges. Investors can consider shorting the ETFs listed below as one tool to help insure against a significant downward move.

Down towards the bottom of the Outlook score in the Technology sector is VOX (Vanguard Telecommunication Services ETF). This is an exchange-traded share class of Vanguard Telecommunication Services Index Fund. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.

Another ETF with a low Outlook ranking, this one in the Consumer Services sector, is XRT (SPDR S&P Retail ETF), an exchange-traded fund that invests in stocks of companies operating in the retail segment of a U.S. total market composite index. The fund, before expenses, seeks to replicate as closely as possible the performance of the S&P Retail Select Industry Index, an equal-weighted market cap index which tracks the retail sub-industry portion of the S&P Total Market Index.

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: DJIA, ETF, SPX, VOX, XRT /