Caution, Bumpy Trading Ahead

by on September 5, 2011 | ETFs Mentioned:

Equity indexes crept up higher since the opening bell at the start of last week, although a grim jobs report on Friday quickly sparked a sell-off, with domestic equities broadly finishing in red territory for the week. The S&P 500 is now back below our outlined support at 1,200 and we advise stepping to the sidelines once again, although active traders can certainly take advantage of the ongoing volatility so long as they are prudent to take profits before they evaporate. Gold appears poised to continue higher as the precious metal has established definitive support above $1,800 an ounce, while uncertainty in the markets will only add to the appeal of the hot yellow metal.

Weekly Outlook

The coming week is quite lacking in major economic releases on the home front, while investors keeping an eye on international data will have more than a handful to talk about. The Euro zone is sure to be the center of attention as GDP data for the region is released early in the week, while an ECB rate decision is also expected on Thursday. The central banks of Australia, Canada, Japan, and United Kingdom are also releasing interest rate decisions this week, which is sure to contribute to some wild swings in the currency markets. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • Rydex CurrencyShares Australian Dollar Trust (FXA): The Bank of Australia is expected to hold rates constant at 4.75% when the decision is released early Monday morning. Investor’s reaction will be more influenced by the economic commentary released after the decision itself, potentially sending FXA higher if the overall tone is supportive of a stronger Aussie dollar at least in the short-run.
  • SPDR DJ Euro STOXX 50 ETF (FEZ): Euro zone Gross Domestic Product data is slated to come out early Tuesday morning, and analysts are expecting year-over-year growth to come in at 1.7%. FEZ is sure to see an increase in trading volumes if the GDP report ignites a sell-off, assuming that investors are displeased with the latest round of output data from the currency-bloc.
  • WisdomTree Japan Hedged Equity Fund (DXJ): Investors who wish to establish equity exposure to the Japanese stock market without dealing with the nuances of dollar-yen exchange rate ought to consider DXJ. This fund may see an increase in trading volumes as investors scramble to readjust positions following the Bank of Japan’s interest rate decision on Wednesday. Analysts are expecting the rate to remain unchanged at 0.10%. Japan GDP is also slated to come out on Thursday, once again putting this ETF in focus as investors react to the latest output report.
  • Rydex CurrencyShares Canadian Dollar Trust (FXC): The Canadian dollar could encounter some volatility versus the greenback in the currency markets on Wednesday morning as the Bank of Canada is scheduled to announce its interest rate decision. The rate will likely remain unchanged at 1%, although FXC is bound to move as investors are sure to have either a bullish or bearish interpretation of the economic commentary released after the interest rate decision.
  • Rydex CurrencyShares Euro Currency Trust (FXE): This ETF will likely see a great increase in trading volume as the ECB and Bank of England are both announcing interest rate decision back-to-back on Thursday morning. Both banks are expected to hold rates at steady at 1.5% and 0.50% respectively.
  • iShares MSCI Canada Index Fund (EWC): This Canada ETF may see some volatility on Friday after the latest employment report for the country hits the street. Analysts are expecting an uptick in the unemployment rate, projecting it at 7.3%, in which case a better-than-expected report will likely send EWC higher.

Persistent volatility in the markets continues to affirm our recommendation to remain on the sidelines until the dust settles. The S&P failed close above the critical 1,200 level for the week, further confirming our hypothesis that we very well might be entering the first phases of a  bear-market rally, in which case investors ought to prepare for more choppy trading and lower-lows in the months to come. Below we have highlighted some technical trade 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.

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