Three ETFs To Watch This Week: XHB, CYB, XLI

by on May 24, 2010 | ETFs Mentioned:

Equity markets experienced another rough stretch last week as the S&P 500 finished down by nearly 5%. Commodity markets also experienced weakness as oil slid to just over $70/bbl. and gold traded in the $1,175/oz. range, down close to $75 on the week. A large catalyst for the downturn in the middle of the week was a report that German banks would be banned from shorting certain debt securities and equities across Europe. However, markets finished the week on a high note as investors cheered the passage of a Senate financial reform bill that ended some of the mystery surrounding the regulatory push. Despite news that the bill threatens to cut into many large firms’ profitable trading desks, financial firms were among the best performers to close out last week (see Beyond XLF: Five Intriguing Financial ETFs).

Upcoming is a rare week without major central bank meetings, during which Europe is likely to remain in focus amid numerous data releases and a few earnings reports. Below, we profile three ETFs that could seen an active week:

SPDR Homebuilders ETF (XHB)

Why XHB Could Be On The Move: A flurry of housing data will be released early in the week with existing home sales data starting things off followed by the 20 city Case-Shiller Index on Tuesday and new home sales on Wednesday. All three are expected to post modest gains over the previous readings with the largest increase coming in the Case-Shiller index (which is predicted to rise from 0.6% to 3.0%). However, with the expiration of the home tax credit on April 30th these numbers are likely to be skewed higher as buyers sought to make their home purchases before the credit disappears. This month’s numbers need to be especially positive in order to alleviate investors’ fears regarding a slowdown in housing now that the tax credit is off the table. Should the numbers fail to meet these expectations, XHB could once again encounter downward pressure (see Homebuilder ETFs Soaring After Surge In New Home Sales).

WisdomTree Dreyfus Chinese Yuan Fund (CYB)

Why CYB Could Be On The Move: Treasury Secretary Timothy Geithner is scheduled to meet with top Chinese officials on Monday and Tuesday at the Strategic and Economic Dialogue in Beijing. While Geithner has been downplaying a focus on the yuan in the talks, he has said that he will continue to urge the Chinese to let their currency appreciate against the dollar. The U.S. Treasury has gone as far as postponing a report on currency practices of key trading partners (including China) until after the talks next week and the G-20 meeting in early June. However, pressure is beginning to build on the Obama administration to take a hard-line stance against the Chinese; 10 Senators signed a document urging Geithner to take a stern line with Chinese officials over Beijing’s refusal to release an International Monetary Fund report that they believe concluded China manipulates the yuan’s value for a trade advantage. Investors will be monitoring the results from these meetings carefully, and CYG could see higher-than-average trading volumes throughout the week (see Warning: Buy China Yuan ETFs At Your Own Risk).

Industrials Select Sector SPDR (XLI)

Why XLI Could Be On The Move:

On May 28th, the Chicago PMI figures for May are scheduled to be released; the market is expecting a modest drop from 63.8 to 60. This comes after a sharp increase last month which saw the Chicago PMI exceed expectations by 3.9 points and post order backlogs of 61.4, suggesting that even if a sudden drop in demand hit it might take months to work through current orders first. The Chicago PMI is considered one of the most important readings for manufacturing in the country, so any large swings are likely to give XLI direction. Look for XLI to surge ahead if the Chicago PMI is able to continue its recent swing upward. But this fund could sink should the reading fall below 60 (also see Industrial ETFs Continue Impressive Rally).

Last Week’s ETFs To Watch:

GLD: Gold bullion had a rough week as the shares of GLD trended lower by more than 4.3%. While GLD saw losses throughout the week, the steepest losses came on Wednesday when the government reported flat core inflation and deflation of 0.1% when food and energy prices were included (see charts of GLD).

FXY: The yen has been in focus as of late as debt issues have sunk the euro. The Bank of Japan left its benchmark rate unchanged at 0.1% as expected but released details about a policy in which private banks would be able to borrow from the Bank of Japan at the 0.1% rate. Lending institutions that take part will need to submit details spelling out “approaches to carry out lending and investment for strengthening the foundations for economic growth,” the Bank of Japan said in a statement accompanying its rate decision. FXY soared higher on the news and was up 2.8% on the week (see technical analysis of FXY).

RTH: Retail stocks faced a rough week as RTH slumped 3.3% on the week. Although Target and Home Depot reported strong earnings, the industry bellwether, Wal-Mart reported a slip in same store sales of 1.1%. “Those shoppers who traded down to Wal-Mart during the depths of the economic recession are now returning to Target and other retailers that they perceive to be of higher quality,” wrote Jeanine Poggi. This slip in sales for the fund’s top holding had an adverse impact on RTH and sent it lower for the week despite relatively strong numbers out of Home Depot and Target (see more information on RTH’s holdings).

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Disclosure: No positions at time of writing.