Equities Poised To Pop

by on August 1, 2011 | ETFs Mentioned:

Investors went along for a downhill  ride last week as debt woes plagued Wall Street, sending the S&P 500 lower by nearly 4% for the week. Corporate earnings were mostly surprises to the upside, but equities failed to stage a meaningful comeback since investors were more concerned with the debt ceiling drama at home. As expected, gold continued its march higher, with futures prices hitting an all-time high of $1,637 an ounce on Friday morning. Our trade recommendations for this week include a defensive position in a domestic sector fund as well as an international fixed-income ETF, while our bullish pick stands to benefit from a rebound in foreign equities.

Weekly Outlook

The coming week is stacked with central bank meetings around the globe, including a key interest rate decision by the European Central Bank which will be watched by many given the deteriorating financial health of the Euro zone. Investors will be kept busy at home as well, with several important economic data releases hitting the street, including manufacturing data, consumer spending, and the unemployment rate on Friday. Below we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • State Street SPDR Industrial Sector  (XLI): Monday morning kicks off with U.S. ISM Manufacturing data and analysts are expecting a slight improvement from last months reading of 55.3%. Investors will look for a surprise to the upside, potentially sending XLI higher, assuming that debt-ceiling talks don’t overshadow a positive manufacturing report.
  • Rydex CurrencyShares Australian Dollar (FXA): This ETF could gap at Tuesday’s open since the Bank of Australia is slated to announce its decision regarding interest rates on Monday evening. Analysts are expecting the rate to remain unchanged at 4.75%, however, FXA can easily see some volatility depending on the outlook and tone of the statement released by the bank after the decision itself.
  • Merrill Lynch HOLDRs Pharmaceutical (PPH): Earnings season continues next week and pharmaceutical giant Pfizer is scheduled to report Q2 earnings on Tuesday morning before the opening bell. Analysts are expecting earnings of $0.59 per share, and PPH may see a spike in trading volumes as Pfizer accounts for 20% of the fund’s total portfolio.
  • Global X Auto ETF (VROM): This ETF is a fairly new product which includes the fifty largest and most actively traded companies worldwide that are engaged in the automobile industry. VROM could see an increase in trading volumes on Tuesday as U.S. Motor Vehicle sales are released. Analysts are forecasting a small jump to 11.8 million sales from last months reading of 11.5 million.
  • Rydex CurrencyShares Japanese Yen (FXY): The Japanese Yen has been crushing the U.S. dollar lately and this trend may further accelerate, or briefly reverse, depending on the economic outlook issued by the Bank of Japan when it announces its decision regarding interest rates on Wednesday evening. FXY could see some volatility on Thursday depending on how investors digest the outlook issued by the BoJ.
  • Vanguard European ETF (VGK): This fund is a potential “hot-spot” for volatile trading on Friday morning since the Bank of England and the European Central Bank are releasing interest rate decisions back-to-back on Thursday evening. VGK could surge higher as European equities rally following a potentially “better-than-expected” economic outlook for the Eurozone.
  • Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX): Volatility has been abundant across financial markets for the past few weeks and it may simmer down considerably on Friday as U.S. employment data hits the street. The unemployment rate for July is foretasted to remain elevated at 9.2%, however, a better-than-expected reading will likely send VXX tumbling lower.

Trading Ideas

This week is filled with economic data releases on the both the home front and overseas and it will be interesting to see whether or not debt ceiling developments will be able to overshadow other relevant market news as they hit the street. Earnings season is also nearing its end, although a handful of industry leaders are still on tap to release performance results this week. Conservative traders are advised to stay on the sidelines until the U.S. Government officially makes a plan of action to deal with the towering deficit, while experienced active traders will likely find themselves in heaven, given the exorbitant amounts of volatility across virtually every asset class.

Below, we highlight some technical trade ideas that could see some nice gains from a rebound in foreign equities, while a rally in the international fixed-income corner of the market would put us in a favorable position as well.  Just note that many 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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