Be Wary Of A Dead Cat Bounce

by on May 21, 2012 | ETFs Mentioned:

After taking a beating last week, equity markets appear to be holding at key technical support levels at the start of this week. More specifically, watch for the S&P 500 Index as it fluctuates around the 1,300 mark; a break below this level could accelerate selling pressures and sink the benchmark to to anywhere from 1,275 to 1,250. The coming week has a number of important economic data reports on the home front that can potentially inspire a bull stampede, although Euro zone headlines can certainly take precedence without notice [see also 3 ETF Trading Tips You Are Missing].

Weekly Outlook

Below, we highlight ETFs that may see an increase in trading activity as relevant market data is released and evaluated by investors:

  • SPDR Homebuilders ETF (XHB): Investors will digest a number of housing market reports this week, including: existing home sales on Tuesday, and new home home sales and home prices data on Wednesday. As such, the popular XHB is sure to see an increase in trading volumes that may help it recover a chunk of the losses from last week’s harsh sell-off.
  • CurrencyShares British Pound Sterling Trust (FXB): United Kingdom inflation data is expected to come out on Tuesday morning before Wall Street’s opening bell; the pound may experience volatile trading in the currency market versus the U.S. dollar as investors digest the CPI reading which is expected to come in at 3.1%.
  • SPDR Gold Trust (GLD): The precious yellow metal has endured a volatile few week as Euro zone debt drama has put its safe haven reputation to the test. Gold, and likewise GLD, may see another spike, in either direction, when the latest German GDP data hits the street on Thursday morning. Analysts are expecting for German economic growth to come in at 1.7%.
  • Industrials ETF (VIS): Domestic industrial stocks will come in the spotlight on Thursday as U.S. durable goods data is released; analysts are calling for the figure to come in at -0.4% versus the previous reading of -3.9%.

The Volatility Index (VIX) hit a multi-month high at the 25 mark last week, showcasing the sheer amount of uncertainty that has returned to the markets. The VIX ought to come back down below the 20 level before bargain prices in the equity market are justifiable for more conservative investors. Buying opportunities are abundant in the current environment, although caution ought to be exercised as lower-lows should not be ruled out as a possibility. If you are committed to bargain shopping, we recommend buying in parts; for example, start by buying 1/3 or 1/2 of your intended position size, this way you maintain the flexibility to add more and bring your average price lower if there is another round of selling, without missing out on the upside.

Below, we have highlighted three 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 SPLV 

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Disclosure: No positions at time of writing.