Volatility Is Still Lurking

by on December 5, 2011 | ETFs Mentioned:

Domestic equity indexes snapped out of their loosing streak last week as investor confidence in the markets improved after a robust start to the holiday shopping season. The bulls charged through Wall Street on Wednesday after a global central bank initiative to lower the cost of dollar funding through swap arrangements sent a wave of buying-euphoria across equity markets. Excitement cooled off before the weekend, despite a better-than-expected U.S. unemployment report, and we expect for volatility to remain abundant this week given the unresolved Euro zone debt drama along with several key central bank meetings.

Weekly Outlook

The coming week will be a bit sparse on economic data releases on the home front, with central bank meetings across the globe dominating international news. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • CurrencyShares Australian Dollar Trust (FXA): The Reserve Bank of Australia is expected to lower its cash rate from 4.5% to 4.25%. FXA could see a gap Tuesday as the data is released before the market opens.
  • CurrencyShares Canadian Dollar Trust (FXC): Analysts are expecting the Canadian bank rate to remain unchanged at 1%. FXC may see an increase in trading volume as investors wait for economic commentary to be released after the rate decision.
  • IQ Australia Small Cap ETF (KROO): Australian GDP data will be released Wednesday morning before market open and is expected to increase significantly from 1.4% to 2.3%. KROO will likely see an increase in trading volume as investors get a better idea of the country’s economic recovery.
  • MSCI New Zealand Investable Market Index Fund (ENZL): Analysts are expecting New Zealand’s central bank rate to remain the same at 2.5%. ENZL may see higher trading volume on Wednesday as investors soak in the economic commentary released after the interest rate decision itself.
  • Japan Hedged Equity Fund (DXJ): Japanese third quarter GDP is expected to fall from 1.5% to 1.3%. Investors will keep a close eye on DXJ on Friday as it could be an appealing option for those who wish to gain exposure to Japanese equities, but also want to avoid currency market fluctuations, as this ETF effectively hedges out current exposure.
  • China All-Cap ETF (YAO): Analysts are expecting China’s consumer price index to fall from 5.5% to 4.5%. With the recent reports of a contraction in Chinese manufacturing, YAO will likely see an increase in trading volume on Friday as investors digest the latest inflation report.
  • SPDR S&P Retail ETF (XRT): U.S. consumer confidence data is expected to rise to 65.9 from a previously reported 64.1. XRT is likely to experience some volatility as investors digest how the consumer sentiment is holding up amidst the ongoing economic uncertainty.

U.S. economic data continues to surprise to the upside as the recovery at home chugs along at a slow and steady pace while Europe continues to drag on investors’ confidence. We anticipate for more choppy trading in the near term, although U.S. markets should be trending higher from a fundamental perspective over the mid-long term horizon. 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 XLU

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