Friday’s ETF To Watch: VXX

by on July 2, 2010 | ETFs Mentioned:

One of the major hurdles facing the U.S. economy as it attempts to continue the recovery from the financial crisis is the stubbornly high unemployment rate. Despite signs that the economy is picking up, job creation to this point has been virtually non-existent. This was demonstrated again this week in a weak private sector report from payroll company ADP; only 13,000 private sector jobs were added across the United States. This dismal report of job creation combined with an unexpected 20,000 person rise in jobless benefit claims sent U.S. markets tumbling in Thursday morning.

Due to these deteriorating numbers, as well as Congress’ recent failure to secure the votes necessary to extend unemployment benefits, close to one million more people could find themselves in desperate need of work by the time the month is over. This is especially troubling given that close to 40% of the 15 million unemployed Americans have been without a job for more than a year, suggesting that turning the tide will be a challenging task [also read Three Low Beta Equity ETFs For A Volatile Market].

These trends make Friday’s jobs report all the more crucial for the entire American economy. The report looks to be particularly bad this month due to the laying off of thousands of temporary census workers, which has pushed the consensus estimate down to a loss of 125,000 jobs in total. However, many analysts are predicting that private payrolls will surge higher by close to 105,000, which will leave the overall official unemployment rate at 9.8%. “The private payroll number is probably going to be a little disappointing,” says John Ryding, chief economist at RDQ Economics “That could continue to feed into the fears that perhaps we’re still not flying at a high enough rate, that this recovery can’t hit the treetops, and we’re going to fall back into a double-dip recession.” [also check out Volatility ETFs: How And How Not To Use]

For this reason, look for the iPath S&P 500 VIX Short-Term Futures ETN (VXX), which tracks the S&P 500 VIX Short-Term Futures Index Total Return, to be in focus on Friday. If the jobs report is especially bad, as some fear it will be be, it could lead to another day of sharp losses–something that VXX seems to thrive on. However, if the economy surprises analysts and job growth appears to be robust, look for VXX to fall sharply lower in early morning trading as equity markets are likely to surge ahead on positive news. “Historically in economic recoveries, once the labor market recovery gets going, it’s usually a bit of a juggernaut and is hard to stop,” said Paul Dales, a United States economist at Capital Economics. “You get a sort of virtuous circle, where hiring generates faster income growth, which generates more spending, which generates more hiring.” [also see Understanding ETF Technical Analysis]

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