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Courtesy of Daniel Sckolnik, ETF Periscope
“Two things are infinite: the universe and human stupidity; and I’m not sure about the universe.” – Albert Einstein
The markets have snapped out of their recent spell of complacency with the sharp pop of a rubber band that has been stretched and released.
The coming week will likely reveal whether the word “robust” can be applied to the current Bull market, or if cracks in the uptrend will lead to a correction that seems on the overdue side of things.
With the Dow Jones Industrial Average (DJIA) spending a good portion of the week tumbling down towards the 12,000 level, it is clear that, at the very least, the current uptrend has lost some wind from its sails, and at the very worst, the markets are about to become more reactive to “real world” events than they have in the last several months.
Specifically, those events are centered on the geo-political upheaval that has occurred in the Middle East over the last month, with a level of uncertainty that has now arisen and has yet to be accurately reflected in either the markets or the mainstream media.
While the price of crude oil has certainly started to serve as a strong barometer for the region’s turbulent events, closing in on the $100 per barrel mark, that price may seem on the low side when and if it becomes clear who actually is in charge of the vast oil supplies within Libya, Egypt, Yemen and Tunisia.
Though the leading producer of the region, Saudi Arabia, has attempted to calm the markets this past week by promising to increase production to cover any shortfalls that the region may experience, the fact is they really don’t have the ability to sustain any serious disruption on a major basis.
The real problem, however, may be the sharks in the water, otherwise known as the “speculators.” Perception is, of course, almost everything in the markets and if prices begin to get jacked up by those playing the crude oil futures markets, as occurred during the run-up to $150 during ’08, then prices can spiral out of control, with lots of collateral damage to the rest of the financial markets.
The next few weeks will reveal a lot, as the direction of the turmoil in the Middle East unfolds.
So, with the markets manifesting a higher degree of uncertainty then we have seen in a while, it may be a good time to augment a conservative approach. One way to hedge your bets is to proceed with a “pairs” strategy, which combines strong stocks with weak ones. The thinking goes like this: Pick the best that you think the market has to offer, and combine it with the weakest equities you can find. Voila! You have just created a ‘pairs” trade.
In a perfect world, the result is that you can benefit in either an up or down market, though you are sacrificing something in terms of upside potential. Such is the nature of hedging, of course. You give up some profit potential so you can sleep at night. Other things can contribute to sleepless nights, of course, depending on a myriad of aspects that form one’s own personal life, such as if you happen to have a newborn baby in the house, but these and other considerations are way beyond the scope of this commentary.
Without further ado, then, here are two pair trades to consider. Both XLV, in the Healthcare sector, and XLK, in the Technology sector, are within the top 5% of Sabrient’s ETF Cast Rankings and have strong fundamental and technical elements in their favor. These are the Bullish recommendations.
On the flip side, IYZ, in the Telecommunications sector, and XHB, in the Homebuilders sector, reside in the bottom 5% of the same rankings, and serve as the Bearish choices for this model.
For the purpose of this example, these ETFs can be configured into pairs of either XLV/XHB and XLK/IYZ or XLV/IYZ and XLK/XHB.
XLV (Health Care Select Sector SPDR Fund) is an exchange-traded mutual fund launched by State Street Global Advisors, Inc. and managed by SSgA Funds Management Inc. The fund invests primarily in the large-cap companies that replicate the performance of companies listed on the S&P Health Care Select Sector Index. The sector includes companies such as pharmaceuticals, health care providers and services, health care equipment and supplies, biotechnology, life sciences tools and services, and health care technology.
XLK (Technology Select Sector SPDR® Fund) is an exchange-traded fund launched and managed by State Street Global Advisors, Inc. and co-managed by SSgA Funds Management, Inc. The fund invests in the stocks of companies operating in the technology sector; specifically, it invests its corpus in the common stocks of companies that form the Technology Select Sector Index in proportion to their weightings in the index. The fund seeks to replicate the performance of its virtual portfolio against that Index.
IYZ (iShares Dow Jones U.S. Telecommunications Sector Index Fund) is a non-diversified exchange-traded fund that seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the Telecommunications sector of the U.S. equity market, as represented by the Dow Jones U.S. Select Telecommunications Index. The fund invests in common stocks of companies that form the Dow Jones U.S. Select Telecommunications Index as per their weighting in the index.
XHB (SPDR S&P Homebuilders ETF) is an exchange-traded fund that invests in stocks of companies operating in the Homebuilding sector. The fund, before expenses, seeks to replicate as closely as possible the performance of the S&P Homebuilders Select Industry Index, an equal weighted-market cap index which represents the homebuilding sub-industry portion of the S&P Total Market Index.
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.
