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ETF Traders Are Welcome, While ETF Investors Need To Wait

22 September 2011 at 4:06 pm by Gary Gordon     Bookmark and Share    Follow EtfExpert on Twitter

If you watch violent television shows, are you more likely to kill somebody? Or, are those who have a predisposition towards violence more likely to view blood, guts and gore? (Watching the stock ticker on Thursday, September 22, was about as gory as it gets!)

Too often, the mainstream media endeavor to¬†attribute a¬†rationale for the irrational. For instance, every¬†participant in the¬†stock markets¬†was well aware¬†of the Federal Reserve’s¬†intention to¬†unleash yet another stimulative exercise for the economy, “Operation Twist.” And¬†nearly every pundit worried that¬†stocks might collapse if the Fed¬†didn’t¬†announce a plan to¬†sell shorter-term U.S. treasuries in exchange for¬†purchasing¬†longer-term bonds. (Makes you wonder how bad stocks might have tanked if the Fed had “disappointed” Wall Street.)

We all know what happened next. Shortly after the announcement on Wednesday, the Dow fell¬†nearly 300 points. And today, the Dow¬†shed an additional 400 points. So naturally, the 2-day 6% shellacking is a direct result of Bernanke’s idiotic efforts to moderate intermediate- and long-term interest rates, right? That’s what the talking heads are saying… and the timing speaks for itself.

When two events occur close together, like the Fed announcement and a subsequent mini-crash, the cause of the sell-off may seem obvious. In actuality, though, traders merely looked for an excuse to push markets towards the low end of the summertime trading range (S&P 500 1096-1233). And in fact, the excuse was not the “Twist” announcement, but rather, the Fed’s assessment that there are “significant downside risks” to the global economy.¬†

Was anyone not aware that there are strains in global financial markets with Europe setting new 52-week lows again and again?¬†We’ve known that the global economy has been¬†weakening and that the European quagmire has been worsening for weeks; traders merely used the¬†opportunity to move from the high¬†end of the long-standing trading range to the low end of that range.

If you need proof that¬†it’s all about the traders, and not¬†new “info,” consider the movement of the VelocityShares Daily Inverse VIX Short Term ETN (XIV). At the precise moment that traders pushed the S&P 500 below the August 8 closing low of 1119.46, I recommended XIV to a few friends. I picked up a few shares myself.

Why? Because when the CBOE Volatility Index (VIX) is pushing 52-week highs… when its inverse is pushing 52-week lows, there’s a very good chance that “long traders” and short covering will cool off the volatility. Sure enough, the stock market finished 1.4% higher than its low for the dismal day, and I have an unrealized gain of 3.5% in VelocityShares Daily Inverse VIX Short Term ETN (XIV)¬†in less than¬†45 minutes. (XIV is up another 2% in¬†after-hours trading as well.)

I won’t be holding XIV, nor do I know how the trade will ultimately fare. More importantly,¬†I am¬†NOT “recommending” that ETF investors start trading their accounts on a daily basis.

¬†The reason that¬†I am bringing this tale to the reader’s attention is¬†to let he/she know that this¬†market is not a market for making heroic¬†decisions.¬†An ETF investor may need to wait to see a breakdown below the bear’s watermark of S&P 500 1096 or a breakout above the correction mark of S&P 500 1233 before enacting substantive¬†portfolio changes.

In a majority of the portfolios I manage for my clients, there’s a healthy helping (20%) of cash and a healthier serving of (40%) of income-oriented ETFs. For example, iShares High Yield Corporate Bond (HYG) is remarkably attractive¬†when one considers the spread between HYG and comparable treasury bond ETFs. Even the equity component is yield-oriented, with SPDR S&P Dividend Aristocrats (SDY) and PowerShares S&P Low Volatility (SPLV).

Remember, one week earlier, U.S. stock assets had just completed their biggest 5-day run-up in over 2 years. Traders pushed stocks from the middle of the range to the high-end, and on what? News that China might buy Italian bonds? Word that Germany and France want Greece to remain in the Euro-zone?

By the same token, don’t blame Chubby Checker’s “Twist” for¬†instituitonal trading action that pushed markets back towards the floor.¬†As an ETF investor, you’ll need to see if the floor holds up or not.

You can listen to the¬†ETF Expert Radio¬†Show¬†‚ÄúLIVE‚ÄĚ,¬†via podcast or on your iPod.¬†You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert disclosure details here.

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