Stay On The Sidelines

by on August 22, 2011 | ETFs Mentioned:

Equity markets struggled to pick a direction last week, fluctuating between small gains and pesky losses one day after the other. Late in the week, however, worse than expected economic data on the home front and escalating European debt woes managed to push the markets of a cliff one more time, with equity indexes sinking lower on Thursday and Friday and closing near the previous week’s low point. From a technical perspective, most charts still look “broken”, and the surge in volume during the sell-offs has been a bit worrisome since money seems to be flowing out of the market and stocks have yet to establish definitive support around current levels.

Weekly Outlook

The coming week is very sparse with economic data releases both on the home front and internationally. Investors hungry for news and up-to-date economic indicators will be a bit disappointed as the only major releases this week are United States and United Kingdom GDP reports. Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • iShares Dow Jones U.S. Home Construction Index Fund (ITB): New home sales data hits the street on Tuesday morning and ITB will come into focus as investors look for hints of economic progress and stability in the house market. Analysts are expecting this figure to come in at 315,000, just slightly above last month’s reading of 312,000.
  • Vanguard Industrials ETF (VIS): This ETF could see an increase in trading activity as durable goods orders data is released Wednesday morning. VIS will easily rally on better than expected results, especially in the currently pessimistic environment, and analysts are expecting a 1.5% increase, versus last months reading of -1.9%.
  • iShares MSCI United Kingdom Index Fund (EWU): United Kingdom GDP is slated to come out early Friday morning, bringing EWU into focus when Wall Street opens. This ETF will likely see some volatility if the GDP results surpass last quarters reading of 0.7% growth year-over-year. Investors will surely keep a close watch on this piece of data and look for any reassurance that Europe is not heading into another economic disaster.
  • iPath S&P 500 VIX Short-Term Futures ETN (VXX): Volatility has been through the roof over the last two weeks and it will likely remain high unless investors have a reason to come back into the equity markets. U.S. GDP is scheduled to come out on Friday morning and analysts are expecting a drop in growth down to 0.9%, versus the last reading of 1.3%. VXX will surely surge on Friday if GDP results miss investor expectations.

Investors should refrain from jumping back into the markets now simply because stocks are “cheap” relative to a month or two ago. Instead, those who are confident that the U.S. economy will remain on track should consider buying in increments. On the other hand, those who are convinced were heading down the drain should refrain from undertaking large “short” positions because it’s very possible for stocks to rally for days, or weeks, even during a bear market. We recommend for new investors to remain on the sidelines until equity indexes establish definitive support. When considering the S&P 500 Index, we recommend for investors to avoid going long SPY until this benchmark ETF closes above $120 a share for three or more consecutive days. Below we have highlighted some technical trade 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.

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