Can Earnings Trump Euro Drama?

by on October 10, 2011 | ETFs Mentioned:

Wall Street was able to close out the week in solid positive territory, although investor worries remain escalated over the uncertainty still plaguing the debt-stricken Euro zone. Waves of optimism and improvements in investor confidence, following a better-than-expected employment report at home, helped stocks climb higher last week. Gold prices remain range-bound although the yellow metal appears to be gaining momentum above the critical $1,600 an ounce level, possibly preparing to rebound higher in the coming days. Earnings season kicks off this week and investors will have platefuls of corporate performance reports to digest, hopefully restoring some confidence back in the U.S. economy.

Weekly Outlook

The coming week is fairly light with major economic releases on the international front, including inflation data from the Euro zone. At home, investors also have plenty on their plate, including an important consumer confidence report on Friday. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • PowerShares DB USD Index Bullish (UUP): The U.S. dollar will likely be the center of attention during Wednesday as last month’s FOMC minutes are released to the public. If the bank report shows a stalemate amongst lawmakers given the concerning economic outlook, investors may find themselves dumping the greenback in the currency market.
  • iShares MSCI Australia Index Fund (EWA): Australian unemployment is slated to come out late on Wednesday evening, potentially leading EWA to gap at Thursday’s open as investors scramble to readjust positions. EWA will likely see some volatile trading if the employment data misses expectations; analysts are expecting for the rate to remain unchanged at 5.3%.
  • Market Vectors Chinese Renminbi/USD ETN (CNY): China’s consumer price index is expected to come in at 6.1%, versus the last reading of 6.2%, on Thursday evening. CNY will likely see an increase in trading volumes on Friday morning as investors react to the latest inflation data from the booming economic giant. If inflation comes in far weaker-than-expected, CNY may see some headwinds as investors flock back to the U.S. dollar.
  • Rydex CurrencyShares Euro Trust (FXE): The Euro zone will be the center of attention all week as investors look to policymakers for guidance and a plan of action going forward. FXE will likely see an increase in trading volumes on Friday morning as the Euro zone consumer price index is released early in the morning. Analysts are expecting a healthy uptick in inflation, with estimates coming in at 3.0% (year-over-year), versus last month’s reading of 2.5%.
  • SPDR S&P Retail ETF (XRT): U.S. retail sales are scheduled to come out Friday morning before Wall Street’s opening bell, potentially leading to increased volatility in shares of XRT. Better-than-expected data can easily lift XRT higher, and analysts are expecting a 0.5% increase in growth, versus last month’s flat reading.
  • S&P VIX Short-Term Futures ETN (VXX): Volatility is still lurking around the corner and investors may find themselves in a trading frenzy once again this Friday after the University of Michigan releases the latest consumer confidence report. VXX can easily spike higher if consumer confidence greatly misses expectations, sparking a sell-off on Wall Street. Analysts are anticipating an increase to 60.4, versus last month’s reading of 59.4.

Our recommendation to remain on the sidelines continues to reward conservative investors who can’t afford to stomach the persistently high-levels of volatility across all corners of the market. We are maintaining our wait-and-see approach until domestic equity indexes can close above key resistance levels–1,200 for the S&P 500–on convincing high-volume trading. Below, we have highlighted some 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 GLD

State Street SPDR Gold Trust
Price Target $170
Time Frame 2 weeks

Analyst Take

Click to Enlarge

Since topping out at $185.85 a share on 9/6/2011, GLD has shed upwards of 10%, and the fund currently appears to be formidably holding support around the $160 level. GLD has endured a healthy correction over the past month, retracing come down close to its 200-day moving average (yellow line). The fact that GLD has managed to hold its ground right near the $160 level leads us to believe that this ETF may have bottomed out. In terms of upside, if GLD manages to break out from its trading-range, investors should consider taking profit near the $170 a share level, while those with an appetite for risk can consider holding until gold soars back to $1,900 an ounce. Conservative, shorter-term investors should consider exiting this long trade if shares slip below the $155 level.

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