Be Wary Of A Steeper Correction

by on September 4, 2012 | ETFs Mentioned:

And so it begins. Regarded by many as perhaps the most dismal month for the stock market, investors on Wall Street welcomed September with a sell-off. Aside from historical performance pointing to tumultuous trading in the weeks ahead, investors’ confidence remains plagued by the looming debt drama in Europe. Furthermore, political debates are heating up on the home front as the presidential election inches closer and closer, adding more to the growing clouds of uncertainty [see also ETF Technical Trading FAQ].

Weekly Outlook

Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • IndexIQ Australia Small Cap ETF (KROO): This ETF could gap in either direction at Wednesday’s open depending on how markets react to the overnight Aussie GDP release. Analysts are expecting for economic growth to come in at 3.7% on a year-over-year basis versus the previous reading of 4.3%.
  • Rydex CurrencyShares Canadian Dollar Trust (FXC): The Canadian dollar may experience volatile trading in the currency market as the Bank of Canada interest rate decision takes place tomorrow morning. Analysts are expecting for the rate to remain unchanged, although the economic commentary following the decision itself typically offers more valuable insights.
  • Vanguard European ETF (VGK): European equity markets will come into the spotlight Thursday as GDP data for the region hits the street along with the European Central Bank rate decision which is scheduled for a few short hours after. Analysts are expecting for growth to come in unchanged at -0.4% on a year-over-year basis while many are anticipating that the ECB will end up slashing rates down to 0.5% from current levels at 0.75%.
  • VelocityShares Daily Inverse VIX Short-Term ETN (XIV): Volatility levels could come down significantly at the end of this week, which would boslter XIV higher, if the latest U.S. employment report shows signs of a quicker-than-expected recovery in the labor market. Analysts are expecting for nonfarm payrolls to come in at 120,000 versus last month’s 163,000; also, the unemployment rate is projected to remain unchanged at 8.3%.

The S&P 500 Index continues to flirt with historical resistance levels as the fundamental picture remains cloudy while at the same time dealing with major congestion from a technical perspective. Price action and volume will likely pick up this week as more participants come back from summer vacation and digest more than a handful of major economic data releases at home and abroad. The Volatility Index (VIX) is approaching the 20 mark, although it would be very surprising to see the benchmark settle above this level as it would suggest that a whole host of uncertainties have resurfaced. Any profit taking in the S&P 500 Index could bring the 1,380 level in sight, while major support comes in at around the 1,360 mark.

Below, we have highlighted three fundamental 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 EZA

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Disclosure: No positions at time of writing.