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ETF Periscope: Contrarians Should Take Notice of Davos Highs, VIX Lows

Courtesy of Daniel Sckolnik, Sabrient Systems and Gradient Analytics

Those who dare to fail miserably can achieve greatly.”  -- John F. Kennedy

According to multiple reports in the business media, the scene at Davos, Switzerland, home to the annual gathering of the World Economic Forum, appears to be more upbeat than during the last few years.

It’s probably not about the skiing.

In spite of slow growth trends in the U.S., an ongoing recession in the Eurozone, and International Monetary Fund projections of weak global growth emerging from International Monetary Fund reports, Wall Street is seeing key indices hitting close to record highs. In addition, among the S&P 500 companies which have reported earnings to date, over two thirds surpassed expectations.

This sort of thing often tends to put the financial glitterati into an upbeat mood.

Of course, it is all relative, as the last few years have provided multiple opportunities for the world’s key financial players to dwell on the downbeat side of things. So perhaps the optimism is more a sigh of relief that the Eurozone seems to be containing any new signs of contagion, China is experiencing more of a soft than hard landing, and the Middle Eastern hot spots aren’t rattling the global markets in knee-jerk fashion.

Retail investors are taking note of the happy-face being put forward by the economic press that, indeed, it may be safe once again to get back into the Wall Street waters.

To add a respected indicator into the mix, the CBOE Volatility Index, almost always referenced as “the fear gauge,” borders close to a six-year low. This indicates that investors are of the sentiment that, at least in terms of the investment landscape, things are relatively stable.

Somewhere, contrarians are plotting their move.

Just about every investor who has read up on Wall Street history has come across the legend of how, back in 1929, Joseph P. Kennedy figured it was time to exit the market when his shoeshine guy offered him the lowdown on the hot stocks to get into.

Something to consider, if you are indeed considering jumping aboard the current bullish uptrend.

Also worth considering: taking advantage of that low volatility. You could do this by adding some volatility insurance to your portfolio in the form of a VIX derivative, such as the ETF VXX.  While something of an imperfect volatility vehicle, VXX does manage to serve the purpose of assisting in managing volatility for many investors.

It’s always worth remembering that when the market drops, the VIX generally rises, and vice-versa. So that insurance would be in the form of buying, not selling the ETF.

What the Periscope Sees

The Healthcare Sector remains at the top of the Sabrient SectorCast ETF Rankings leaderboard. The Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis.

Here is a list of some of this year’s top performing Healthcare Sector ETFs to date, as of the last full week of January:

IHI — iShares Dow Jones US Medical Devices Index Fund, +10.55%

FXH — First Trust Health Care AlphaDEX Fund, +9.73%

XBI — SPDR S&P Biotech ETF, +9.61%

VHT — Vanguard Health Care Index, +7.74%

IHE — iShares Dow Jones US Pharmaceuticals Index Fund, +7.27%

As an alternative to buying the ETFs themselves, consider purchasing call options as a way to leverage your portfolio’s funds. For this purpose one could use May expiration calls, several strikes out-of-the-money.  Though you do pay a premium when buying any options, volatility levels sit at recent historical lows, providing options buyers an opportunity to purchase calls at something of a discount relative to recent pricing.

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

Disclaimer: This newsletter is published solely for informational purposes and is not to be construed as advice or a recommendation to specific individuals. Individuals should take into account their personal financial circumstances in acting on any rankings or stock selections provided by Sabrient. Sabrient makes no representations that the techniques used in its rankings or selections will result in or guarantee profits in trading. Trading involves risk, including possible loss of principal and other losses, and past performance is no indication of future results. 


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