Will The Market’s Fireworks Continue?

by on July 4, 2011 | Updated July 5, 2011 | ETFs Mentioned:

Last week saw markets perform very well to close out the quarter as the Dow gained more than 600 points in five days. This robust gain came thanks to declining fears over a Greek default and solid manufacturing data in the U.S. This led many to buy equities on the dip, resulting in solid gains for all the major indexes for the week and helping to erase the negative memories that started June. This rally gave a big boost to one of our actionable ETF ideas last week, while putting our short positions in a bit of a hole. We are back at it again this week with three fresh ideas that seem positioned for a solid Holiday-shortened week. Additionally, we look to highlight some of key data releases over the next few days so that investors can be aware of when volatility may strike some of their holdings.

Weekly Outlook

Thanks to the start of a new quarter and Independence Day in the U.S., this week is light on data once again, especially on the earnings front. No major companies look to give their quarterly updates over the next few days but there are a few key data points that investors should keep their eyes on during the week. Chief among them are the numerous central banks which are scheduled to give their decisions on rates over the next few days. The Reserve Bank of Australia, the ECB, and the BOE all meet this week, along with meetings from smaller economies such as Sweden and Mexico as well. In terms of data, investors will likely hone in on Wednesday’s ISM non-manufacutring data, GDP reports from New Zealand, and the unemployment situation in the U.S. on Friday. At time of writing, the consensus called for a 0.1% drop in the unemployment rate down to 9.0%. If this happens, it could push equities to two solid Friday sessions in a row.

  • PowerShares DB USD Index Bullish Fund (UUP): Thanks to a short-term resolution to the Greek debt crisis as well as strong equity performances, demand for safe havens such as the U.S. dollar has been slumping. It also hasn’t helped that the debt ceiling issue is still weighing over the market, threatening to crash into portfolios in early August and further lessening the appeal of the greenback as a safe haven. However, this could change thanks to a string of solid data regarding the U.S. economic situation. Manufacturing data has been strong, but it remains to be seen if it has carried through into more jobs. That is why traders of UUP should pay special attention to Friday’s jobs report as it could signal how good the economy is really doing. If investors see strong hiring, it could boost demand for dollars further signaling how robust the U.S. economy is compared to other developed markets which are struggling.
  • iShares MSCI New Zealand Investable Market Index Fund (ENZL): ENZL looks to be in focus this week for two reasons, both relating to the country’s GDP report. Beyond the official figure which will show how the economy is performing, investors will likely compare the level of growth to the previous quarter and the year ago period to see how the nation is recovering from the recent earthquakes. If growth remains low it could signal a slow growth environment for the nation and potentially push traders out of ENZL for the time being, at least until the country shows higher growth prospects.
  • Rydex CurrencyShares Swedish Krona Trust (FXS): Since Sweden sits outside the euro zone, much of its economy has been immune to the immense challenges that are plaguing many of its neighbors to the south. Nevertheless, Sweden has been slow to raise rates, fearing that a stronger krona would hurt the country’s exports and make its products uncompetitive with its increasingly cheap counterparts in the euro zone. As a result, the country hasn’t risen rates since October but that could soon change, especially if the EU gets their act together. Should that happen or if inflationary pressures begin to rise, investors should look for FXS to have a rocky week and could potentially appreciate if it appears a rate hike is coming soon down the pike.
  • iShares MSCI EMU Index Fund (EZU): Given the bullet that the euro zone dodged last week, markets rose across the board on speculation that a number of countries wouldn’t be forced into default in the immediate future. Yet, this euphoria is likely to have worn off by now and fundamentals are likely to be in focus again this week. A number of issues still plague Europe so further commentary on Greece, Ireland, and Portugal could move this fund again this week. Additionally, traders should key in on the important ECB policy meeting that takes place on Thursday. In this meeting, the central bank will discuss its expectations for rates and will likely give further commentary on the debt crisis. As a result, any comments could greatly move currency markets and the equity components of this fund.
  • Rydex CurrencyShares Australian Dollar Trust (FXA): Thanks to weakness in commodity prices as of late, it remains to be seen how the country’s central bank will react in terms of interest rate expectations in the near term, especially later this week when the RBA meets to discuss rates. All economists in a recent survey expect the Reserve Bank of Australia to keep rates on hold at this week’s meeting at the current level of 4.75%. With that being said, six of ten believe a 25 basis point hike is in the cards by the end of the quarter while all predict that a rate hike will take place by the end of the year. Inflation remains moderate but at the high end of the spectrum so any comments regarding this and growth prospects are likely to weigh on the RBA’s policy statement, potentially signalling when the bank is looking to raise rates. If it appears as though Australia will see a hike sooner rather than later, FXA could recoup some of its recent losses against the greenback and turn in a solid week to start the third quarter for the Aussie dollar.

Trading Ideas

Given the strong performances from the market last week and the longer term trend downwards, this could be a very interesting period for global markets in the next few days. Concerns on the debt front are beginning to shift to other PIIGS members while the U.S. is running into issues of its own thanks to failure to pass an increase to the debt ceiling. Given this backdrop, we have highlighted a few ways to play the markets over the next couple of days using a combination of technical and fundamental readings. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques: 

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