Picky Bulls, Broad Bears

by on July 18, 2011 | ETFs Mentioned:

Wall Street continued its wild ride last week as equity indexes sank lower after a discouraging downgrade of Ireland to junk status and ongoing worries about the debt ceiling on the home front. Alcoa started the week with upbeat results and Google left investors smiling on Friday as shares soared upwards of 10% after the internet giant crushed analyst expectations. Gold emerged as the strongest performing asset class yet again; the precious metal continues to ride higher as financial markets across the globe largely remain uncertain and last week’s futures prices climbed to record highs of $1,594 an ounce. Our trade recommendations for this week include a defensive position with international exposure in the fixed-income market, while our other two picks are positioned to gain from a rally in select corners of the equity-market from across the globe.

Weekly Outlook

The coming week is fairly sparse with economic data on the international front, while earnings kick-into high gear at home as investors position themselves for the second week of corporate performance results. Goldman Sachs among other financial and banking giants will report this week, and volatility in the financial sector has historically translated into broad-based sell-offs and rallies. Below we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • Rydex CurrencyShares Canadian Dollar Trust (FXC): The Bank of Canada is scheduled to release its decision regarding interest rates on Tuesday and analysts are expecting the rate to remain unchanged at 1%. It’s highly unlikely that the BoC will raise rates any time soon, and especially before the United States. We expect the Canadian dollar to rally against the U.S. dollar in the currency market if any bullish commentary is released in the statement following the decision itself. Investors interested in establishing currency exposure should consider FXC, as this fund is very popular amongst traders and will likely see some volatility if investors are surprised in any way by the bank’s decision and/or commentary.
  • RevenueShares Financials Sector Fund (RWW): Tuesday is a busy day for the financials sector as key industry giants all report earnings before the bell. RWW will likely see an increase in trading volumes as Goldman Sachs, Bank of America, and Wells Fargo all report earnings, given that these firms are all included in the fund’s top 10 holdings.
  • Dreyfus Brazilian Real Fund (BZF): The Central Bank of Brazil is slated to release its decision regarding interest rates on Wednesday and analysts are expecting a 25 basis points hike, which would raise rates to 12.50%. The outlook on inflation for Brazil remains a bit worrisome since the booming country has seen prices increased outside of the government’s desirable target range.  Investors should keep an eye on BZF, which tracks the performance of the real versus the U.S. dollar, as this fund could see volatility after the interest rate decision is announced, and especially if the Central Bank’s actual decision deviates from investor expectations.
  • SPDR Homebuilders ETF (XHB): Shortly after the opening bell on Wednesday, existing home sales data will hit the street and investors will digest the latest insights about the recovery of the domestic housing sector. XHB is the most liquid ETF available to investor who are looking for exposure to the U.S. housing sector through equities in the construction and home building industry.
  • HOLDRS Merrill Lynch Oil Service (OIH): Diamond Offshore Drilling (DO) is the eight largest holding in OIH and given that this fund has only 14 components in total , it’s very likely for this ETF to see some volatile trading on Thursday as the company reports earnings. Last quarter’s earnings came in at $1.73 a share, and analysts are expecting the drilling giant to report earnings closer to $1.89 a share this time around.
  • Vanguard Industrials ETF (VIS): General Electric (GE) and Honeywell International (HON) both report earnings results on Friday and shares of VIS could see an increase in trading volumes given that both companies are within the funds top ten holdings. Investors should keep in mind in the larger scheme of things as even more important than the earnings results themselves are the actual comments and forward looking guidance made by industry leaders.
  • IQ Canada Small-Cap ETF (CNDA): This fund could be a “hot” trade on Friday after Canada’s Consumer Price Index is released and investors digest the latest reading of inflation. Analysts are expecting inflation to fall to 3.5% from the previous reading of 3.7%.

Trading Ideas

Following a week dominated by financial woes from the Euro zone, the stock market sort of forgot that earnings season had kicked off on the home front. This upcoming week will be with sparse economic data from around the globe, but earnings season at home continues and performance results from more than a handful of industry giants are sure to move the markets. We’re optimistic about upcoming corporate results, especially from the technology sector, however, we haven’t quite dipped both feet in the water as we also remain defensive given ongoing worries about the debt/slow-recovery situation at home and abroad. Below, we highlight some technical trade ideas that could see some nice gains from a bounce in the equity markets, while a rally in international treasuries would also put us in good position. 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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