Bulls Look To Sustain Momentum

by on October 31, 2011 | ETFs Mentioned:

Improving optimism over the Euro zone debt negotiations coupled with positive earnings and economic data releases at home pushed stock markets higher last week. Investor confidence improved considerably as domestic equity indexes climbed higher above key resistance levels and held onto gains the entire week. Bailout talks in the Euro zone reignited fears of inflation, paving the way higher for gold. The precious metal finally broke out of its trading range and settled near $1,740 an ounce to close out the week. We anticipate relatively higher volatility in the markets this week given the pivotal FOMC talk and ECB interest rate decision.

Weekly Outlook

The coming week will focus on the European Central Bank interest rate decision, while at home investors will be paying close attention to the latest unemployment figure. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • iShares MSCI Canada Index Fund (EWC): Canada’s GDP is expected to be released Monday evening potentially leading EWC to a gap at Tuesday’s open. Analysts are expecting for growth to come in at 2.2%, versus last month’s reading of 2.3%.
  • Global X China Industrials ETF (CHII): Chinese PMI Manufacturing data will likely increase trading volumes of CHII on Tuesday as investors adjust expectations. Emerging markets are generally held to higher growth expectations than developed nations, so this fund may experience some volatility if investors are disappointed with the data release.
  • IQ Australia Small Cap ETF (KROO): The Australian interest  rate is scheduled to be announced late Monday and analysts are anticipating for it a drop down to 4.5%, versus the previous reading of 4.75%. Investors should pay close attention to the commentary and outlook released after the interest rate decision itself to gain a better idea of the countries economic health.
  • State Street SPDR Gold Trust (GLD): The FOMC decision on Wednesday will likely create some volatility as investors adjust positions between equity holdings and exposure to safe havens. Interest rates are expected to be kept low, but more importantly investors should pay close attention to the FOMC statement to gain insights about future monetary policy decisions and outlook on the economy.
  • Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX): Bernanke is set to speak Wednesday afternoon at the Fed’s press conference. Trading volume in the VIX index, also known as the “fear indicator”, can be expected to increase as investors make bets on how Bernake’s future plans will affect the markets.
  • Rydex CurrencyShares Euro Currency Trust (FXE): FXE may see a gap on Friday morning as the ECB will announce its interest rate decision late Thursday evening. Investors will be paying close attention to the press conference to gain further insight on how policymakers plan on restoring stability to the debt burdened Euro zone.
  • State Street Consumer Discretionary Select Sector SPDR (XLY): The U.S. unemployment rate is expected to be released on Friday morning and analysts are expecting for the figure to remain unchanged at 9.1%. XLY may see higher trading volumes as investors scramble to readjust positions in equity markets after gaining insights on the health of the U.S. labor market.

The bulls are on a roll and we anticipate for equity markets to climb higher and remain resilient, although volatile profit taking is by no means out of the question. From a technical perspective, we see the S&P 500 potentially dipping back to 1,250, although ideally the index should close out the week above this key level if bullish momentum is to remain strong. Below, we have highlighted some technical trading ideas for the upcoming week. Note that most of these recommendations require active management as they are only relevant for a very short period of time. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.

Actionable ETF Idea #1: Short FXA

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