Bullish Abroad, Defensive At Home

by on July 11, 2011 | ETFs Mentioned:

Domestic equities were shaky last week to say the least, managing to rally on Thursday and immediately sell-off on Friday following a very dismal employment report. Gold emerged as the strongest asset class, while crude oil futures fluctuated wildly much like equity markets across the globe. Earnings season officially starts this week and we are cautiously optimistic that companies will surpass market expectations, although a strengthening dollar could create headwinds. Our trade recommendations for this week are geared towards international exposure and one of our picks is very appealing from both a technical and fundamental perspective, making it a potentially attractive tactical tool for traders.

Weekly Outlook

The coming week will be anything but sparse of headlines as investors keep a close eye on the markets once Alcoa Inc. kicks off earnings season after the market closes on Monday. Corporate earnings will be the central focus in the next coming weeks, while in terms of economic data, U.S. consumer price index will have the spotlight on Friday. Data from overseas will be very light this week and the biggest event is the Bank of Japan interest rate decision followed by New Zealand’s GDP report mid-week. Below we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • WisdomTree Japan Hedged Equity Fund (DXJ): The Bank of Japan is scheduled to release its decision regarding interest rates on Tuesday and analysts are expecting the rate to remain unchanged at 0.10%. It’s highly unlikely that the BoJ will raise rates any time soon, likewise, we expect Japanese equities to rally if any bullish commentary is released in the statement following the decision itself. Investors interested in establishing equity exposure, but wish to avoid the effects of volatility in the currency markets, should consider DXJ as this fund offers exposure to equity securities in Japan, while at the same time hedging exposure to fluctuations between the value of the U.S. dollar and and the Japanese yen.
  • iShares MSCI United Kingdom Fund (EWU): Consumer Price Index for the United Kingdom will come out a few short hours after the BoJ meeting. Analysts are expecting the core CPI to rise to 3.4% on a year-over-year basis from the previous reading of 3.3%. EWU should see an increase in trading volumes if the actual CPI number comes in far from expectations and investors scramble to buy or sell depending on how favorable inflation expectations are.
  • iShares Barclays 7-10 Year Treasury Bond Fund (IEF): On Tuesday afternoon during Wall Street trading hours the FOMC minutes from June 21-22 meeting will be released.  The minutes of each regularly scheduled meeting of the FOMC are ordinarily made available three weeks after the day of the policy decision and the minutes do include the complete economic analysis compiled by Fed officials and whether or not any FOMC members have voiced opinions at odds with the rest of the group. IEF is incredibly liquid and popular amongst day traders and the fund may very easily surge in either direction, depending on how the market digests the forward looking economic projections released with the FOMC minutes.
  • Market Vectors China ETF (PEK): Tuesday evening China GDP will be released and investors across the world will surely watch closely as the growing giant reports. Analysts are expecting growth to come in at around 9.5%, just slightly under the last reading of 9.7%. Investors looking to establish exposure within the growing Chinese equity market ought to consider PEK, as this fund provides one-of-a-kind exposure to A-Share stocks listed on the Shenzen and Shanghai exchanges.
  • iShares MSCI New Zealand Investable Market Index Fund (ENZL): A few hours after Wall Street closes on Wednesday, the New Zealand GDP report will make headlines and analysts are expecting growth to drop to 0.5%, from the last reading of 0.8%. A greater than expected decline in growth will likely damped investor optimism and shares of ENZL are poised to drop if profit taking across Asian markets follows.
  • SPDR S&P Retail ETF (XRT): On Thursday morning just before Wall Street’s opening bell, U.S. retail sales are slated to come out and analysts are expecting the June figure to climb back to 0%, from the previous reading of -0.2%. XRT will most likely see an increase in trading volumes since retail sales often times move the market upon release, given that the figure provides valuable insight into consumer demand as well as consumer confidence.
  • VelocityShares Daily Inverse VIX Short-Term ETN (XIV): U.S. Consumer Price Index comes out on Friday before the market opens and the last reading came in at 3.6%, while analysts have mixed expectations about this months number. If the CPI remains within a favorable range then volatility will likely decline, sending XIV higher, given that the fund tracks the inverse performance of the CBOE Volatility Index.

Trading Ideas

Following Friday’s dismal employment report it is evident that the U.S. economy is far from being out of the woods and many investors are still worried about a potential double-dip. While we certainly aren’t cheerful with regards to the most recent economic data that has been coming out of the U.S., we remain cautiously bullish on equities, while certainly recognizing the inherent volatility and risks that still plague the market. Despite all of this ongoing uncertainty, we still believe there are plenty of opportunities to profit from in the market, and below we have highlighted some technical trade ideas. Just 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.

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