Beware Of Earnings Volatility

by on January 23, 2012 | ETFs Mentioned:

The bulls took charge on Wall Street last week as investors reacted positively after a number of encouraging economic data releases. Home builders confidence and existing sales continue to point towards signs of a recovery in the battered down U.S. housing market. Better-than-expected jobless claims also helped restore confidence in the domestic economic recovery. Earnings euphoria also played a key role last week, although so far the results have been a mixed bag; industry giants like Google and Citigroup missed the mark, while Bank of America, IBM, and Intel beat analyst estimates.

Weekly Outlook

The coming week will be stacked with earnings releases on the home front, although several key reports from overseas will also come into focus. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • CurrencyShares Japanese Yen Trust (FXY): The Japanese yen could experience volatile trading in currency markets as the Bank of Japan releases its latest interest rate decision on Tuesday night. Look for FXY to potentially gap Wednesday morning as investors digest the bank’s economic outlook.
  • iShares MSCI United Kingdom Index Fund (EWU): This ETF will come into focus Wednesday after investors react to the latest United Kingdom GDP report. Analysts are expecting for economic growth to remain flat at about 0.5%.
  • SPDR Homebuilders ETF (XHB): The December pending home sales report will hit the street on Wednesday morning, bringing the spotlight onto XHB. Analysts are expecting for the figure to come in just above the previous month’s reading of 7.3%.
  • Vanguard Industrials ETF (VIS): Investors will shift their attention to the latest durable goods report when it comes out Wednesday morning on Wall Street. VIS could experience volatile trading if the figure misses estimates by a long shot. Analysts are expecting for durable goods orders growth to come in at 3.3%, versus the previous reading of 3.7%
  • iShares Barclays Aggregate Bond Fund (AGG): This ultra-popular bond ETF may experience an increase in trading volumes if the latest U.S. GDP report due out on Friday misses the mark. Analysts are expecting for economic growth to come in at 3%, versus the previous reading of 1.8%.

Euro zone woes have eased up considerably thanks to encouraging developments from lawmakers, although the recent credit rating downgrade by Standard & Poor’s for a handful of countries in the region is undoubtedly a major roadblock. U.S. economic data continues to surprise to the upside and investors are gradually becoming more and more confidence in the recovery. Below, we have highlighted three 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 GDX [hide 4]

Van Eck Market Vectors Gold Miners
Price Target $57.50
Time Frame 1 week

Analyst Take

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GDX missed out on last week’s broad-based rally thanks choppy trading in the gold futures market. However, this ETF is currently sitting near the bottom-half of its trading range, which may present a lucrative buying opportunity with substantial upside for those who can stomach the risk that comes with holding onto this rather volatile commodity producers fund. GDX is hovering right around significant support near $50-$52.50 a share, which means that traders ought to keep an eye on this ETF in case it breaks to the downside. A rebound in gold prices and/or bullish momentum in the stock market are two factors that may bolster GDX higher this week. Were taking a long position with a liberal stop-loss at $50 a share, along with a price target at the $57.50 level.

Actionable ETF Idea #2: Long UUP

PowerShares DB USD Index Bullish
Price Target $22.75
Time Frame 1 week

Analyst Take

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The U.S. dollar took a dive lower last week as equity market euphoria created headwinds for the greenback in the currency markets. Although we are undoubtedly bullish on the economic recovery at home, UUP may take on safe haven appeal this week if Euro zone debt woes resurface, or if disappointing corporate earnings make way for the bears. This ETF has been establishing rising levels of support since taking off in early November last year; UUP has come down near support at the $22.25 level, which makes this an appealing buying at the moment for traders who believe that equity markets are due for a brief pullback. Were taking a long position with a conservative stop-loss at $22.25 a share and a price target at the $22.75 level.

Actionable ETF Idea #3: Short XBI

SPDR S&P Biotech ETF
Price Target $70
Time Frame 1 week

Analyst Take

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This short recommendation is purely from a technical perspective; notice how XBI has encountered resistance right at the $75 level, which is where the fund previously topped out at on 6/1/2011 when it hit $75.86 a share. Additionally, this ETF has been approaching the $75 mark on falling volume, which is often times considered to be an indication that bullish momentum is dying down and a trend reversal may soon occur. Were betting that history will repeat itself, seeing as how this ETF failed to break the $75 level on 6/1 and later again on 7/14/2011. Investors should note that this ETF has been in a robust uptrend since bottoming out in early August, which makes this short recommendation speculative. Were putting a tight stop-loss at the $75 level, along with a price target of $70 a share.

Disclosure: No positions at time of writing.