Which Way Will The Bulls Run?

by on October 17, 2011 | ETFs Mentioned:

Stocks finished in bright green territory last week as investor worries over the Euro zone subsided, while corporate earnings at home gave the bulls a reason to come back to Wall Street. France and Germany pledged their full support  to the debt-stricken currency block and promised a concrete plan to ensure stability by November. Gold remains range-bound and the precious metal has been drifting inch by inch along rising support, possibly preparing to break out past the $1,700 level this week. Earnings season continues and investors will have platefuls of corporate performance reports from several industry giants to digest this week.

Weekly Outlook

The coming week is stacked with major economic releases on the international front, including Chinese GDP and inflation data from the United Kingdom. At home, investors also have plenty on their plate, including an important consumer price index report on Wednesday. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • Guggenheim China All-Cap ETF (YAO): Chinese GDP is slated to come out Monday evening, putting this popular China ETF in focus for Tuesday morning. Analysts are expecting the booming Asian giant to report growth of 9.3%, slightly down from the previous reading of 9.5%.
  • Rydex CurrencyShares British Pound Sterling Trust (FXB): United Kingdom CPI comes out early Tuesday morning and FXB may gap at opening bell as investors scramble to readjust positions. Inflation is expected to come in at 4.9%, up from the previous reading of 4.5%, which may prompt the central bank to take greater measures to ensure that rising prices don’t hurt the fragile recovery.
  • SPDR Gold Trust (GLD): This popular safe haven may take on appeal during Wednesday after investors digest the latest inflation data from the United States. CPI is slated to come out as the opening bell rings and analysts are expecting for inflation to remain at 3.8%.
  • SPDR Homebuilders ETF (XHB): New housing starts for the month of September are scheduled to come out on Wednesday morning as well, bringing focus to XHB as investors digest the latest data from the housing industry. Analysts are anticipating 590,000 new homes, versus last months reading of 571,000.
  • IndexIQ Canada Small Cap ETF (CNDA): Canadian equity markets may experience some volatility on Friday after the latest CPI report for the country comes out. Analysts are expecting for CPI to inch back to 3%, versus last months reading of 3.1%. If inflation comes in far weaker than expected, CNDA may face some headwinds as investors grow worried over the health of the economic recovery.

Our recommendation to remain on the sidelines has proven to be rewarding for conservative investors who can’t afford to stomach the persistently high-levels of volatility across virtually every corner of the market. We are maintaining our wait-and-see approach until domestic equity indexes can open and close out the week above key resistance levels–1,200 for the S&P 500–on convincing high-volume trading. 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: Long JJG

DJ-UBS Grains Total Return Index
Price Target $50
Time Frame 2 weeks

Analyst Take

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Consider JJG’s chart and notice how this fund topped out at the $55 level at least four times this year. JJG appears to have established support right around the $43 level, given the high-volume trading that took place on 9/30/2011 and 10/3/2011, during which this fund dipped to a new recent low of $41.95 a share. Commodity prices have been brutally beaten down as a whole over the last two months and the grains especially have considerable upside potential. This long recommendation is not suited for conservative traders since JJG remains in a technical downtrend, given that this ETF is still trading below its 200-day moving average (yellow line). In terms of upside, we think that $50 a share is a reasonable target over the next two weeks, assuming that the equity market rebound remains correlated with commodity prices. We recommend exiting this trade if shares close below the $45 level.

Actionable ETF Idea #2: Short IEF

iShares Barclays 7-10 Year Treasury Bond Fund
Price Target $100
Time Frame 1 week

Analyst Take

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IEF appears to have formed a potential double-top at $106.66 a share, since this ETF failed to close above this high on 10/4/2011, and has since declined lower. However, IEF is also holding support at the $102 level, perhaps suggesting that the fund might be due for a rebound higher. We feel that the theme of risk-aversion may become less popular this week so long as corporate earnings give investors a good reason to flock back to the equity markets. We recommend closing out this short position if IEF gets back above $104 a share. Likewise, we advise for conservative shorter-term traders to take profits at $100 a share.

Actionable ETF Idea #3: Long UUP

PowerShare DB USD Index Bullish
Price Target $22.25
Time Frame 1 week

Analyst Take

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This is our fundamentally defensive pick for the week, and we anticipate for the U.S. dollar to rally if corporate earnings disappoint or if Euro zone debt-woes spill over onto Wall Street again. Since breaking above its 200-day moving average in mid-September, UUP went onto to climb up to $22.50 a share before encountering resistance and turning lower. UUP, a popular safe haven in times of crisis, has turned lower over the past two weeks, given the capital inflows back into equity markets bolstered by improving investor confidence. Volatility is still lurking around the corner and worse-than-expected corporate results may lead to a broad-market sell-off, which makes UUP our defensive instrument for the week. In terms of upside, shorter-term traders may take profits at $22.25 a share, while we advise exiting this long trade if UUP closes below $21.50 a share.

 

Disclosure: No positions at time of writing.[/hide]