Far too frequently, commentators focus on one of two potential outcomes. For example, one writer may explain why riskier assets will navigate the fiscal cliff and rocket substantially higher into the New Year. Meanwhile, another may predict the collapse of market-based investing altogether, with the Dow plummeting 3000 points before Christmas.
Greed and fear. Bull and bear. Democrat and Republican. Is there really nothing in the middle?
In truth, there are plenty of times when participants simply cannot make up their minds. The light may be yellow, rather than red or green.
Consider the widely followed “fear gauge,” the CBOE S&P 500 Volatility Index (VIX). A fear-mongering forecaster may overemphasize the reality that the VIX has climbed above a shorter-term, 50-day trendline, then insist the end of days is a near certainty. In contrast, a buy-n-hold blogger may point to the fact there have been 6 VIX spikes above 25 over the last 3 years, and that the current environment isn’t even as “fearful” as the mild correction that occurred this past May.
In essence, people often see what they want to see. And sometimes, making a bold prognostication about a monster rally or a massive sell-off makes a headline. Yet VIX volatility is sending mixed signals about the future direction of S&P 500 stocks.
It’s not just the VIX either. The S&P 500 SPDR Trust (SPY) is hugging its 200-day long-term trendline. Is there enough support? It may depend on the ability of the U.S. government to negotiate a fiscal cliff solution.
Currency ETFs are equally confounding. Specifically, post-election results show a rise in PowerShares Dollar Bullish (UUP) and CurrencyShares Yen Trust (FXY), a sign that might be “bearish” for riskier assets. The decline of emerging currencies and the euro-dollar might even bolster that claim.
At the same time, few currencies are far enough above or below a near-term 50-day trendline to make a definitive call. What’s more, the CurrencyShares Australian Dollar Trust (FXA) often has volatile drops during times of unusual market stress. Yet for the time being, FXA is calm, cool and collected. Give some credit to the recent economic upticks in Asia.
|Post-Election Currency Update|
|Approx 1-Week||50-Day MA|
|WisdomTree South African Rand (SZR)||-2.1%||-3.1%|
|WisdomTree Brazilian Real (BZF)||-1.9%||-0.9%|
|CurrencyShares Swedish Krona (FXS)||-1.5%||-2.1%|
|WisdomTree Indian Rupee (ICN)||-1.1%||-1.6%|
|CurrencyShares Euro Trust (FXE)||-0.9%||-1.6%|
|CurrencyShares British Pound (FXB)||-0.8%||-1.3%|
|CurrencyShares Australian Dollar (FXA)||0.0%||1.0%|
|PowerShares Dollar Bullish (UUP)||0.5%||1.3%|
|CurrencyShares Japanese Yen Trust (FXY)||1.2%||-0.8%|
There is no need to downplay the threats that exist. Europe’s economy is contracting, U.S. leaders are sparring and global corporations aren’t meeting expected sales targets.
Still, an imminent market meltdown is probably not in the tea leaves. And if it is, there are simple methods for protecting your capital through “covered calls,” stop-limit loss orders as well as hedging techniques. Make sure that you know precisely how to control the outcomes for all of your investment decisions.