ETF Insider: Correction Pressures Are Mounting

ETF Database

The bears swept in Monday morning after worrisome news from the Euro zone over the weekend prompted a rapid sell-off at Wall Street’s opening bell. Profit taking pressures were quick to emerge after it was reported that European policymakers proposed a tax on Cypriot bank deposits, leading many to worry that this policy change could spill over to larger nations in the debt-burdened currency bloc, namely Italy and Spain [see also How To Hedge With ETFs].

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, A+): Homebuilders will come into the spotlight on Tuesday morning as investors digest the latest housing starts data from last month. Analysts are expecting for this figure to show modest growth coming in at 913,000 units versus last month’s reading of 890,000. 
  • Market Vectors Germany Small-Cap ETF (GERJ, C+):  This German equity ETF could gap in either direction Tuesday morning as markets digest the latest ZEW Survey results, which offers a look at economic sentiment in the European powerhouse. Analysts are expecting for this survey reading to remain unchanged and come in at 48.1. 
  • DB USD Index Bullish (UUP, A):  The U.S. dollar may experience volatile trading in the currency market Wednesday afternoon as investors react to the latest FOMC announcement and Chairman Bernanke’s press conference.
  • MSCI New Zealand Investable Market Index Fund (ENZL, A):  This ETF may gap in either direction Thursday morning as investors react to the overnight New Zealand GDP report. Analysts are expecting for the island-nation to post economic growth of 2.3%, marking a modest improvement over the previous reading of 2.0%. 

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Volatility

Everyone knows that a correction is coming, however, the tougher question to answer is just how steep will it be? Monday’s sell-off appears to be short-lived profit taking seeing as how the news from Cyprus holds no material weight for stocks on Wall Street. At this point, any sign of “bad news” is enough to inspire brief selling pressures; a steeper correction can develop if there is a significant change in fundamentals, which seems unlikely given the string of upbeat economic data for the past few months. Investors should however be aware of the looming sequester drama that may very well resurface at the end of the month as it could provide the much needed catalyst for a healthy correction. From a technical perspective, the S&P 500 Index has support around 1,525 along with resistance near the 1,570 mark. 

Below, we have highlighted three 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 BTAL

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Disclosure: No positions at time of writing.

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