A Most Unexpected Rally

by on July 2, 2011 | Updated July 8, 2011 | ETFs Mentioned:

The past week saw a furious rally in equity markets across the globe, with the big run-up occurring at a time when many least suspected a bump. All eyes were on Greece to start the week, and concerns had been intensifying over undesirable developments in one of the most cash-strapped developed economies in the world. But the can was kicked a bit further down the road this week as lawmakers there approved austerity measures that will allow for another wave of bailout payments to keep the country afloat for at least a few more months.

Greece’s outsized impact on the global economy continues to amaze; the positive developments there quickly rippled throughout the global markets, sending stocks around the world sharply higher in the second half of the week. That rally gave a big boost to many of the ETFdb Portfolios, reversing a string of consecutive losses in our all-ETF portfolios (more on this below).

Actionable ETF Trade Ideas

The actionable ETF ideas from Monday’s ETF Insider were based on fundamental analysis of the current environment–though we must admit that the huge rally in equity markets this week was somewhat unexpected. In the wake of the big rallies, our picks endured a mixed week; our call on a corner of the U.S. equity market thrived, while the bet against international equities came back to haunt us. After an up and down week, we highlight the performance of these three ideas [sign up for a free ETFdb Pro trial to get actionable ETF ideas every week]:

Trade #1 Long QQQ: Up 6.4%

Last Week’s Actionable ETF Ideas
Ticker Position Performance







Our bet on one of the most widely followed U.S. equity markets turned out quite nicely, as the NASDAQ surged on the week as broader markets climbed higher. The tech-heavy QQQ, which had lagged behind other broad-based U.S. equity indexes so far in 2011, jumped by more than 6% this week. That gain was better than many other broad-based U.S. indexes; SPY climbed by only about 5.5% during the week.

We’re a bit concerned that the recent rally is without merit; the current environment seems like a great opportunity to take some profits and shift assets to lower risk assets. So now might be a good time to pocket some gains in QQQ after a big jump.

Trade #2 Long IEF: Down 2.4%

We liked IEF this week thanks to a long-term uptrend in mid-term futures, noting that lingering risks in Europe and at home seemingly set the stage for increased interest in safe haven assets. But the relatively uneventful passage of austerity measures in Greece upped investors appetite for risk, and IEF tumbled as desire for Treasury exposure waned.

If you share our thoughts that the market rally came without sufficient justification from underlying fundamentals, IEF might be an appealing way to shift towards safer assets ahead of next week’s activity.

Trade #3 Short RSX: Down 6.2%

We put our faith in technical indicators predicting a short-term pullback in Russian equities this week. But Russian stocks jumped sharply higher over the last several days, thanks to a more broad increase in risk tolerance among investors. As a result, our short position in RSX immediately lost ground; as we mentioned Monday, we recommended bailing if the $38 level was hit. That level corresponded to a loss of about 3.3% on the week; those who stayed in all week realized a more substantial loss of close to 6.2%. We wouldn’t be the least bit surprised if RSX pulls back a bit in early trading after the extended holiday.

ETFdb Portfolios

Retirement ETFdb Portfolios

The rally in global equity markets put a jolt into our long-term, retirement-focused portfolios over the last week; many jumped considerably after sloshing through the first half of the year at close to break-even. Not surprisingly, the longer-term portfolios fared better than those designed for investors approaching retirement; heftier allocations to equities thrived, while many fixed income funds weighed on returns:

ETFdb Portfolio Weekly Return YTD Return
30 Years To Retirement 4.35% 6.55%
20 Years To Retirement 4.33% 6.45%
10 Years To Retirement 3.46% 5.84%
Cheapskate 3.28% n/a
Moderate 2.78% 5.45%
5 Years To Retirement 2.71% 5.14%
Ready To Retire 1.40% 4.81%

Themed Portfolios

Among our themed portfolios, the big rally in stock markets represented a reversal from previous weeks; many of the worst performers from the first few weeks of June busted out of slumps to surge sharply  higher. Only the Sky Is Falling ETFdb Portfolio prevented a clean sweep in positive territory for the week; not surprisingly, that portfolio lost ground (thanks in large part to the hedge through exposure to volatility).

The portfolios with the biggest international allocations were the biggest winners of the last week, and our Asia Centric ETFdb Portfolio is finally back into the black for 2011:


ETFdb Portfolio Weekly Return YTD Return
RAFI 5.84% 5.45%
Ex-U.S. 4.81% 4.32%
Asia Centric 3.66% 0.70%
Alpha Seeker 2.0 3.58% 7.83%
Emerging & Frontier Markets 3.53% 1.46%
Actively-Managed 3.21% 6.89%
High Yield 3.19% 6.13%
High Tax Bracket 2.99% 5.79%
Black Swan Hyperinflation 2.83% 2.76%
Ben Graham 50/50 1.53% 6.01%
Sky Is Falling -0.77% -0.57%

New ETF Highlights

The past week was one of the quietest of the year so far on the product development front; though more than three dozen new ETPs debuted in June, only one new addition came out over the last week. Don’t expect the lull to last for long; new product launches should accelerate again after the long holiday weekend [see the ETF Launch Center for updates on all new ETFs]:

ETF Launches

S&P 500 Crude Oil Linked ETN (BARL)

BARL is a very unique offering; this ETN is linked to an index that includes both exposure to large cap U.S. stocks and crude oil futures. It’s important for investors to understand the effective leverage used by BARL; every $1 invested essentially provides $2 worth of exposure. In addition to access to the S&P 500, investors in this ETN get exposure to near-month WTI oil futures and near-month Brent Crude oil futures.

BARL should perform well when oil markets are climbing, through investors should also note that the underlying oil exposure is achieved through a futures-based strategy. Based on some historical performance data, BARL has experienced some periods of huge gains as well as huge losses over the last ten years; the gaps to the plain vanilla S&P 500 are considerable [see full write-up on BARL].

Disclosure: No positions at time of writing.