“It’s not wise to violate rules until you know how to observe them.” — T.S. Elliot

For the majority of 2012, the market has been acting like a fairly reasonable creature, as opposed to the nervous and jittery beast that dominated Wall Street for the second half of 2011.

Since December, when the European Central Bank finally came up with a big enough “bazooka”, in the form of its Long-Term Refinancing Operation (LTFO), to address the Eurozone banks liquidity crisis, investors have pivoted with rather surprising speed from risk-off to risk-on.

The result has been a strong and steady uptrend in the equity market, which has sent the key indexes soaring to heights not experienced since the financial crisis hit full force back in 2008.

In spite of the fact that the Dow Jones Industrial Average (DJIA) shed about 20 points on the final day of last week’s trading calendar, it is certainly worth noting that the Dow just finished a run of seven consecutive sessions that concluded in the black. For those who keep score of such streaks, it has been over a year since the Blue-Chip Index ran off that many winning sessions in a row.

Of greater significance perhaps is the fact that the benchmark Standard & Poor’s 500 Index (SPX) managed to remain above the psychologically significant 1,400 level, as it reflects a broader cross-section of the equity market compared to the far narrower DJIA.

Reflecting the high correlation of the European bourses with Wall Street, Europe’s equity market has also been seeing some of its best overall performance numbers in over eight months, when the fear of Greek contagion became the elephant–sized blip on the radar of concerned investors.

On Friday the SPX stayed above the 1,400 level it hit just last week, the first time since May 2008 it topped that lofty number. Meanwhile, European stocks hit their highest level since before the market’s slump in late July.

That investors are feeling more confident and less skittish at the moment can also be seen by a quick read of the VIX (Chicago Board Options Exchange Market Volatility Index), which is often referred to as the “fear gauge.” It continues to trade at the very bottom of its 12-month range, even hitting numbers that it hasn’t visited since 2007.

Some observers see this current round of investor complacency, as being reflected in the VIX, to be a sure sign that the market may be ripe for a correction and that the time for taking profits off the table may be close at hand.

However, the trend is inarguable, and how to play it remains the question.

As things currently stand, the mood on Wall Street seems to be, at least for the moment, robust enough to shake off the same stirrings and rumblings from both the EU and the domestic economy that, until the calendar flipped over to the New Year of 2012, would have sent sellers into panic and buyers off to the sidelines.

What the Periscope Sees

With the VIX remaining at a relative low point, it may be regarded as a reasonably priced portfolio hedge. At the same time, it may also be seen as the perfect match for a pairs trade, riding alongside your favorite Bullish play.

One example of such a trade might consist of using the VXX (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the VIX near-term futures contracts, as a proxy for the volatility index, and pairing it with XHB (SPDR Homebuilders ETF), which tracks the S&P Homebuilders Select Industry Index.

With a spate of housing data due to be reported this week, analysts are projecting some relatively positive numbers to emerge. It may finally be time for investors to consider adding some of this sector to their portfolio, if they haven’t already, particularly as there is a fair amount of headroom for the sector to travel.

One way to play this trade would be to go long both the XHB and the VXX. Another way to make the trade would be to buy call options for both the VXX and the XHB.

Two longs as a pairs trade? Sure.

What makes this so is the fact that the VIX generally goes up when the market dives, and vice versa.

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 Daniel Sckolnik/Sabrient. Daniel Sckolnik/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.

“The fear of death follows from the fear of life. A man who lives fully is prepared to die at any time.” — Mark Twain

Wall Street will once again look towards the Fed for signs of a promise, no matter how vague, of QE3. And, like a Rorschach test, investors will pretty much interpret Tuesday’s scheduled statement from the Federal Open Market Committee (FOMC) in a way that matches their own expectations.

In lieu of any clear and bold pronouncement, the FOMC will likely play coy, expressing general content with the current direction of the market, thereby indicating that nothing of note needs to be changed, and that the current level of growth is acceptable.

It would be highly unusual for the Fed to effectively contradict itself, and Ben Bernanke has already staked out his position last month, during the course of his testimony on Capital Hill.  While there, he shared his stony visage with the members of the House Financial Services Committee, gracing their presence with his reasoning on why an additional round of more-or-less free money is not really required at this time.

So far this year, the majority of domestic labor reports has mainly supported the growth paradigm and in turn would seem to support Bernanke.

It was not too long ago that economists thought that the Fed had run out of arrows in its quiver, and the expectations by investors that they are even considering pulling the trigger on additional quantitative easing would seem to reveal a large shift in sentiment towards the ability of the Fed to impact the domestic economy in a positive way.

There is, of course, another factor that could change the dynamic created by the Fed, no matter what it might prove to be. That, of course, is the small matter of the Eurozone.

Both Wall Street and the European bourses seem to have bought in to the whole story that Greece is on the mend simply by virtue of having secured enough funds to pay its March credit bill. With an adequate number of private bondholders having just agreed to take a communal “haircut” of 53%, the Greek government has managed to knock off a sweet 105 billion in euros from its outstanding debt. This action now provides Greece with restricted access to 130 billion euros in new loans, based upon the most recent deal cut between Athens and the Eurozone leaders.

The problem is that additional conditions imposed upon the Greeks are likely to go unfulfilled. The notion that the Greek citizenry will subject itself to a further round of austerity measures seems almost nonsensical. And with national elections just around the corner, there is no shortage of politicians willing to give voice to a country already in a certified recession. If the elections bring in a wave of new leaders who won’t agree to continue the harsh conditions required of the current deals, then the possibility of a default by Greece will once again rear its ugly head, like a Hydra right out of Greek mythology.

Of course, the Fed may say all the right things, and the Dow Jones Industrial Average (DJIA) might shoot up past the 13,000 mark, the S&P 500 Index (SPX) past 1,400, and the Nasdaq Composite Average (COMP) past 3,000. In such a scenario, the Eurozone could continue to play its very recent role of second fiddle to a more positive market sentiment, and the Bulls could keep the current trend intact.

So, say it’s QE3, please, FOMC.

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 Daniel Sclolnik/Sabrient. Daniel Sckolnik/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.

“Get your facts first, then you can distort them as you please.” — Mark Twain

A lot has happened since the Dow Jones Industrial Average (DJIA) last hovered above the 13,000 level. Bush the Younger was still holding court. Buying a house seemed like an expensive but riskless proposition. Gas was considered radically expensive at $3 a gallon. Facebook had a mere 100 million users.

Now it’s baaack. At least it was, for a few days anyway. The next question is whether that same 13,000 level will become a level of support or resistance.

The factors that will help shape that particular paradigm are the usual suspects: The health of the U.S. economy and the sentiment of investors to the latest round of euro-zone news.

Though all three of the major indexes suffered small declines on Friday, there were a series of small events that might prove to be telling. For the Dow, in addition to the fling with the psychologically important 13,000 number, it was the fact that the Blue-Chip index had ended in the black for each of the months going all the way back to October. In comparison, the S&P 500 Index managed to pull off its third consecutive month of gains. More importantly, though, the benchmark index seems to be establishing 1,350 as a base for another possible leg up. As for the tech-heavy Nasdaq Composite Index (COMP), it achieved its very own milestone, nudging up to the 3,000 level, which is significant, as you’d have to go all the way back to the year 2000 in order to place the last time it traveled at such lofty levels.

Last week’s round of economic reports certainly took some of the wind from the sails of the recent uptrend in the equities market, as home prices fell lower, manufacturing data revealed an unexpected dip, and durable goods orders tailed off sharply for January.

Investors will certainly follow this week’s economic data closely in an effort to gauge the lay of the land in terms of the nation’s economic health. Patterns are a big factor for investors as they try to read the tea leaves, and the new monthly unemployment report, due at the end of the week, will be as watched as carefully as a bear watching a honeycombed beehive.

As far as the ongoing saga of the Eurozone’s sovereign debt crisis goes, the signing of the fiscal pact, agreed to back in December by a majority of EU members, was pretty much a non-event, as it was pre-ordained so to speak, and left no real impact upon either Wall Street or the European bourses.

In addition, the “firewall” generally regarded as a necessary tool to contain the possibility of euro-zone contagion, was shown little love at the summit. No additional funds were pledged to the cause, nor were there any real expectations that there would be.

So, at least in terms of the Eurozone, no significant news was regarded once again as a good thing by investors. This would seem to indicate that most of the uncertainty is baked into the market, at least until the next shock emerges, which could come as soon as April.

That’s when Greece is scheduled to hold national elections. At that point, the dynamics of the current Greek bailout could shift considerably, along with investor sentiment.

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 Daniel Sckolnik/Sabrient. Daniel Sckolnik/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.

“Do the difficult things while they are easy and do the great things while they are small. A journey of a thousand miles must begin with a single step.” – Lao Tzu

At the rate things are going, it seems likely that oil won’t find itself below the $100 per barrel price level anytime soon. And, while you can blame Iran for being the straw that stirs the current brew of high crude prices, it is clearly the speculators that are driving the prices up to the highest levels in over nine months.

Crude oil gained 6% on the week, ending Friday at just a notch shy of $110 per barrel. It is obvious that there hasn’t been a sudden and urgent increase in demand for the stuff, as growth has been fairly minimal on both the domestic and international front. The source of movement of the commodity has essentially emanated from the machinations within the political arena, not the increased demands of the manufacturing sector. The jacked-up prices can be traced to the place where speculators thrive, as they are essentially betting that the threat of a broken supply chain will be all it takes to keep the price near or above its current level, for the short term, anyway.

The problem of the moment revolves around a string of events resulting from the U.S. and the EU attempting to rein in Iran’s nuclear intentions. The tool of choice for the allies has been a new round of sanctions, including the freezing of Iranian assets by U.S. banks and an Iranian oil embargo promised by the EU. The Iranian government has responded predictably, rattling its sabers and swearing to block the crucial oil shipping lanes that pass through the Straight of Hormuz.

As even the casual observer of the Middle East can attest, it doesn’t take a whole lot of threats and counter-threats swirling around the region to send the cost of crude high and higher.  And, with a crucial round of elections scheduled for next week in Iran, the stage is set for amplified hostilities, even if it remains in the realm of verbal-sparring.

Toss an ever-edgy Israel into the mix, and the global markets cannot help but be impacted by fear and doubt. What is interesting, at least at the moment, is that the only market that seems to be significantly impacted is the energy market. True, the U.S. equity market has admittedly slowed down its Bull-mentum the last four trading sessions, though both the Dow Jones Industrial Average (DJIA) and the S&P 500 Index (SPX) gained 0.3% during the holiday-shortened week.

The SPX is currently wrestling with the 1,370 line, and, if it can counter the wave of resistance that it has encountered over the course of the last week, it may break through the level of its 2011 highs and proceed to open the throttle on the Bull Train that’s been proceeding consistently so far this year.

However, should the saber-rattling escalate to more concrete hostilities, all bets are off, as a higher crude would stamp out whatever growth the U.S. might be experiencing, and fear in the market would bring out the Bears, who have begrudgingly hibernated so far this year.

What the Periscope Sees

The VIX (Chicago Board Options Exchange Market Volatility Index) has been trading towards the lower end of its twelve-month range, indicating that investors and traders have been feeling a little bit calmer about the market. Risk-taking has started to replace fear somewhat, and that is reflected in the VIX. A lot of that change has occurred due to the perceived shift in the euro-zone’s direction, and whether that viewpoint turns out to be an accurate one or not, the focus of investors has certainly been upon the other side of the Atlantic.

Iran simply has not been predominant upon Wall Street’s radar, at least up until now.

What the current set of circumstances provides, then, is an opportunity to catch up on some portfolio insurance via the VIX, at what is a relatively low price. The explosive nature of the VIX, which can shoot up 20% or more within a few days if the market starts to tank, makes it a valuable tool for protecting yourself against sharp, downside moves.

You can’t trade the VIX directly, but you can use one of the various ETFs that track the Volatility Index. The VXX (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the near-term futures, is a good vehicle for the job, as it is one of the most liquid of the VIX-based ETFs. The VXZ (iPath S&P 500 VIX Mid-Term Futures ETN) can also be used to similar effect, though it has a slightly less explosive nature than the VXX, as it tracks the VIX mid-term futures.

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 Daniel Sckolnik or Sabrient. Daniel Sckolnik or 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.

“Public opinion is no more than this: what people think that other people think.” — Alfred Austin

For those of you who haven’t had a Playbill handy, the latest revival of the drama known as the Greek sovereign debt crisis played out into the wee hours of Tuesday morning, as euro-zone finance ministers and the related cadre of state officials crossed the T’s and dotted the I’s of an agreement that will once again provide bailout funds to the struggling Mediterranean country.

In exchange for the lofty sum of slightly over $170 billion to be provided by the euro-group, consisting of the euro-zone members’ financial leaders, Greece has pledged to yet another round of austerity measures that are targeted to create a steep reduction in its debt-to-GDP ratio. The ratio currently sits at around 160%, and the stated intention by both the Athens government and its once and future lenders is to lower it to 120%.

Never mind that there seems to be a dearth of actual investors, economists, and political leaders that believe Greece will be able to attain such a stunning turnaround in a mere seven years. To a large extent, that’s not really the point. What it does accomplish is to allow both Greece and the rest of the euro-zone to continue to stare across the card table and see who will call the bluff as to whether a default will actually occur.

Will it be the Greek government, who has, up until the moment the new agreement was signed, protested extremely loudly that its citizens would not tolerate being squeezed beyond the point they already have been? Perhaps it will be Germany, who has insisted that greater accountability in the form of increased belt-tightening is the necessary cost of remaining in the euro-zone, although the countries are so entangled that it would be hard to say who would suffer greater economic hardship should a default actually occur.

In any event, the latest bailout is simply a stopgap measure, in the sense that the new agreement is only the first of a series of steps that requires a quarterly review process, one put in place to assure that the terms of the loan are being followed. It is possible that, as soon as Greece holds its next elections in April, the conditions required in exchange for the current bailout funds will be called into question.

Though part of the new agreement focused on having Athens stay the course regardless of who the ruling party turns out to be, eventually it will be up to the Greek populace to either honor the terms or to ultimately default.

For the moment, at least, it won’t be a surprise to see Wall Street respond with a subdued cheer as it puts to temporary rest the high level of concern investors have rightly held as the Greek drama has unfolded. The equity market’s current Bullish trend shall likely continue, though it will likely be timid until more certainty is restored around the euro and its Union, if indeed it ever shall be.

In the meantime, the matter of oil and the Middle East has returned to the radar of traders and investors in a big way, courtesy of Iran.

Tehran has reacted to further threats of embargo by the European Union by returning the favor and threatening to immediately withhold shipments of crude to both Britain and France. In addition, Iran promised to halt future shipments to any other European country that participates in the embargo.

The result of all this economic saber rattling was that oil futures hit their highest price level in over nine months. As of Tuesday morning, the spot market showed bids above $105 per barrel.

As far as the U.S. domestic economy goes, the coming week’s round of economic data, including existing home sales, new home sales, and the latest consumer sentiment report will give investors a chance to show how they are weighing the players on the playing field, and if domestic positives, should they indeed be in place, trump international concerns.

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 Daniel Sckolnik and/or Sabrient. Daniel Sckolnik and/or 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.

“The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.” — Marcel Proust

The recent uptrend in the equity market has not only been due to some improved metrics on the domestic economy, but as well, to the vague promise that the euro-zone drama has inched its way towards some sort of resolution of the matter of a default by Greece.

This past Friday’s combination of EU news and the subsequent market reaction has, however, revealed once again that the uncertainty of the EU sovereign debt crisis is likely to remain as perhaps the most critical obstacle to Wall Street’s pursuit of a serious Bull Run.

Once again, investors grew spooked by the apparently never-ending drama referred broadly as the EU sovereign debt crisis, and they took the opportunity to lock in some profits from the impressive recent run-up in stock prices as a precautionary measure.

The deep fears of investors over the whole euro-zone debt crisis has been effectively calmed these last five weeks, a period that has seen both the S&P 500 Index (SPX) and the Nasdaq Composite Index (COMP) boast consecutive gains during those weeks. But Friday saw all three of the major indexes, including the blue-chip Dow Jones Industrial Average (DJIA), suffer their worst losses so far this year. And, while the drop was widely attributed to the euro-zone uncertainty, it was no doubt exacerbated by the University of Michigan/Thomson Reuters report that its consumer sentiment index had fallen from 75 to 72.5.

This one-two punch left the Dow down close to 90 points, dropping the index for a 0.5% loss on the week. Meanwhile, the SPX shed 9 points, falling to 1342. While it suffered a relatively small 0.2% drop, it is worth noting that this corresponds to resistance met at the benchmark index’s 1350 level. Technically speaking, this 1350 level may serve as a reflection of the battle line drawn between the success and failure of the current round of Greek debt negotiations.

Up until Friday, recent expectations were running fairly high that somehow, someway, the Greek government would muster the political will to sign off on the latest austerity demands required by a number of euro-zone finance ministers in exchange for a second bailout package. However, it became increasingly clear throughout Friday’s trading session that no firm commitment would be forthcoming from Athens, at least not during the course of the trading day.

There is an essential disconnect between the requirements of the euro-zone finance ministers for Greece to tighten its fiscal belt, and the actual citizens of that country, who are racing headlong into a recession that seems highly likely to worsen if austerity continues to trump growth. So, while Greece continues to stare into the face of a 19 billion dollar debt bill coming due on March 20, the Greek politicians must walk the fine line and high wire of somehow satisfying the demands made by its creditors who won’t fork over a shiny new loan unless strict conditions are met, and its citizenry, who have taken to the streets in protest of having to suffer increasingly harsh conditions.

It is a tight tightrope that needs to be kept taut, though all objective indicators would seem to point in the direction that some slack must be cut somewhere, somehow. It is a cat-and-mouse game, with some serious consequences resulting from how it will all end up being played out.

What the Periscope Sees

The VIX (Chicago Board Options Exchange Market Volatility Index) shot up by 11.6% on Friday, which gave the “fear index” its biggest jolt in about three months. Sitting at 20.79, it nevertheless remains at the low end of its recent six-month trading range. As such, and with the euro-zone sovereign debt crisis hardly resolved, using this explosive index as a hedge continues to make sense. The 11.6% jump clearly illustrates the value of the VIX as an excellent vehicle for hedging your portfolio.

If you are convinced that the EU drama has yet to be effectively baked into the price mix of the equity market, consider pairing up a trade on a VIX-based trading vehicle, such as the VXX (iPath S&P 500 VIX Short-Term Futures ETN), with the next Bullish trade you put on.

While most successful “pairs trades” obviously limit upside potential to a certain degree, adding this type of hedged play to the mix might just allow you to sleep a whole lot better at night, even if you happen to be having dreams of Italian espresso, French croissants, and arguing euro-politicos.

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.

“A round man cannot be expected to fit in a square hole right away. He must have time to modify his shape.”  –  Mark Twain

The Bulls have grabbed the momentum by the horns and seem poised to ratchet the trend up a notch or two. As long as investors are convinced the EU sovereign-debt beast has been momentarily tamed, the next blast of positive domestic economic news could carry the equity market above its pre-subprime mortgage crash levels.

Provided, of course, that the next U.S. news cycle blast accentuates the positive.

Exactly how much momentum did the equity market assume last week? Quite a bit, as Friday saw the Dow Jones Industrial Average (DJIA) hit its highest level since May 2008, ending the week at 12,862, up 1.6%.  The benchmark S&P 500 Index (SPX) performed even better, rising 2.3% over the course of the week’s five sessions, which gave SPX a fifth week in a row of gains. And finally, the Nasdaq Composite Index (COMP), which has been on its own five-week tear, posted a 3.2% rise this past week.

For many investors, over and above these impressive stats, was the fact that 2012 is off to one of Wall Street’s fastest starts in 25 years. Year-to-date, the SPX is up 6.9%, and sits comfortably atop its 200-day moving average, as well as the psychologically important 1300 level. The 1300 mark could now become a strong level of support for the SPX, providing for a blast-off point for the next leg up.

Two key elements occurred that allowed the uptrend established this year to continue. First, the U.S. Labor Department reported Friday morning that almost a quarter of a million jobs had been added to the economy. This number was better than many economists had anticipated, and had the dual effect of dropping the unemployment rate to 8.3% and prodding investors to buy stocks after the report was released early in the trading day.

The other element that occurred or, more accurately, didn’t occur, was the fact that nothing unexpected emerged from out of the EU. This is hardly to say that a wave of good news emerged from the beleaguered euro-zone. It was more a matter of there being no news that shocked investors.

So are investors now willing to shrug off EU concerns and focus on the current round of good domestic news? Well, they are willing, of course, but events could shift that sentiment quickly, despite the current Bullish momentum.

What could some of those events look like? For one thing, the Greek government seems to be thumbing its nose at the demands being made on it by the European Central Bank, the International Monetary Fund and the European Commission, collectively referred to as the “Troika.” What the Troika wants is for Greece to sign off on a number of labor and fiscal reforms in exchange for receiving yet another round of loans necessary for Athens to meet some of its debt obligations.

If the Greek government fails to reach agreement with the Troika, it will have a domino effect of dark circumstances that investors may currently be convinced has already been baked into the market.

Sentiment, however, can shift on a dime, and even a New Year’s worth of momentum could find itself running smack into a new wall of concern, followed by a reversal of that very same momentum.

What the Periscope Sees

With the EU crisis hardly resolved and the VIX (Chicago Board Options Exchange Market Volatility Index) sitting at a seven-month low, traders and investors alike should view this moment as an opportunity to latch on to what may be considered some severely discounted insurance.

It makes sense to ride the trend-train on its continued trajectory, but makes no sense to assume that all the potential issues that could arise from a euro-zone collapse has been adequately addressed.

Consider buying a volatility hedge via the VXX (iPath S&P 500 VIX Short-Term Futures ETN), one way to play the VIX right now.

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.

“If it’s a penny for your thoughts and you put in your two cents worth, then someone, somewhere is making a penny.”   — Steven Wright

As the World Economic Forum (WEF) wraps up its annual meeting in Davos, Switzerland, on Sunday, a large chunk of its agenda will be reexamined around the table of the first European Union summit of 2012, which convenes on Monday.

And, judging by Wall Street’s response last week to large chunks of chatter that emerged from the closely watched “meeting of the minds” of world leaders and key financial and business experts, the euro-zone seems to remain the central concern of investors for what is likely to be the indeterminable future.

There is no question that Wall Street is primarily in an uptrend. Dating back from late November of 2011, the Dow Jones Industrial Average (DJIA) has skyrocketed a whopping 11.5% as of market close last Friday. The steep gains hardly came in a straight and steady progression, however, as a new round of euro-jitters shook up the market mid-December.

Still, the uncertainty seems to have given way to a certain degree of New Year optimism as solid U.S. corporate 4Q earnings have, on the whole, been slightly better than expected, and economic indicators out of Washington seem to indicate an economy that is moving very slowly and in tiny increments, yet somehow is managing to achieve a degree of steady growth.

January’s market gains have been consistent, at least for the first three weeks, as all three of the major indexes have moved steadily into the Bull’s camp. However, that trend tapered off somewhat last week as a consistent trickle of negative sentiment emerged out of Davos.

The result was that the Dow suffered its first losing week since mid-December, and was the first time this year that doubt appeared to reassert itself, though every time a wave of selling seemed to threaten to dominate, a succession of buyers responded and more or less righted the ship.

Landing at 12,660, DJIA was off 0.5% for the week. The benchmark S&P 500 Index (SPX) was up, but just barely, ending at 1,366, up 0.5%. Lastly, the Nasdaq Composite Index (COMP) turned in the best performance of the trio, coming in at a 1.1% profit.

What emerges from the EU summit should reveal the depths that the euro crisis has been effectively baked into the market.

A key point of overlap between Davos and Brussels, where the EU summit shall take place, is the recognition of the need of a “firewall.” This term references a necessary level of funds that are widely regarded by the European Central Bank (ECB), the International Monetary Fund (IMF), and many euro-zone leaders to be sufficient to handle a default by one or more of the PIIGS (Portugal, Ireland, Italy, Greece and Spain.)

Many world leaders at Davos, including U.S. Treasury Secretary Timothy Geithner and U.K. Prime Minister David Cameron, have re-emphasized a demand that Europe adds substantial funds to accomplish such a firewall.

The scale of the current debt crisis can be better seen when you take a look at the numbers currently put aside to halt the dominos from toppling should defaults actually go into affect. The European Financial Stability Facility (EFSF) boasts a total of 780 billion euros, while providing lenders the ability to access 440 billion euros. Geithner, in particular, has been shouting for months that the euro-zone members need to increase the leverage of the fund to accomplish that purpose. The IMF, meanwhile, is currently seeking to raise about 750 billion in euros in order to better handle additional issues that might arise out of the euro-zone crisis.

There may continue to be enough positive news from the corporate earnings reports due out next week to deflect from any negative noise from across the pond. While one could balance out the other, a concurrence of sentiment from corporate America and the EU could set the tone for the market in a clear way.

In either direction.

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.

“Confusion is a word we have invented for an order which is not understood.” –  Henry Miller

The Dow Jones Industrial Average (DJIA) rose by almost a full percentage point on Friday, but like so many aspects of the current market, that number is somewhat misleading.

Tech leader IBM powered the Dow to its fourth winning day in a row, which left the blue-chip index up 2.4% on the week. However, with IBM being the highest-priced component within the Dow universe, its upward move, coming in at over 4%, disproportionally raised the Dow’s bottom line.

For comparison, if you take a look at the S&P 500 Index (SPX), it gained a relatively paltry 0.1% on Friday. However, the benchmark index, which offers a far more accurate read on the equity market in general, did manage to gain 2% on the week, placing it at a level not seen since late July of 2011. It now has a very minimal cushion of 1% atop the psychologically important 1,300 level, while also sitting relatively high above its own 200-day moving average.

Rounding out the big three indexes, the Nasdaq Composite Index (COMP) lost 0.1% on Friday, suffering defeat at the hands of the bad beat investors put on Google (GOOG) following its unenthusiastically received 4Q earnings report.

Fourth quarter earnings season has, on the whole, been the prime mover for the mini Bull Run that Wall Street has experienced since the ball dropped on the New Year. Though the numbers reported by companies so far have generally met analysts’ expectations, the upward trend in stocks year-to-date can be at least partially attributed to the fact that, so far for the year, domestic reports out of Washington have fallen into the “neutral-to-fair” category.

Probably a far greater factor in January’s current upward trend has been the fact that negative noise out of the euro-zone has been minimal. And, while investors are hardly dancing in the streets due to enacted solutions geared towards solving the EU debt crisis, sentiment does seems to be leaning towards the possibility that the worst of the matter may be baked into current stock prices.

This assumption may prove to be a major flaw, at least in the long term.

While the new head of the European Central Bank (ECB), Mario Drahi, has so far managed to convey the right sentiments at the right time, helping to effectively offset some of the rumors and innuendo that have at times injected high doses of volatility into the market, the euro-zone remains a powder keg simply due to the massive debt owed by the PIIGS (Portugal, Ireland, Italy, Spain and Greece). There is only so much that Germany, France, and even the International Monetary Fund can do to stem the bleeding without inflicting wounds on themselves.

The fact remains that the weapon of choice expounded by both investors and the broader European Union, deeper austerity measures, is nothing if not a prescription for recession for EU member-states. And, with an estimated 18% of profits of S&P 500 companies coming from Europe, it is not a stretch to see that a slump in EU growth will impact both U.S. and global investors in a major way.

In the meantime, enjoy the Bull, but don’t be shy about humoring the Bear and offsetting your portfolio with a few smart hedges.

What the Periscope Sees

Speaking of hedges, one of the Periscope’s favorites remains the VIX (Chicago Board Options Exchange Market Volatility Index), which serves as a reasonably good read on investor sentiment in general, and an excellent tonic to a reactionary market specifically.

On Friday, the VIX ended the day at 18.28, a number that it hasn’t seen in six months. Prior to last summer’s “euro-swoon,” the VIX had established a solid support level around 15. On the other hand, once the cracks in the EU began to come into sharper focus, the VIX zoomed up close to 50. With some of the euro-zone issues being addressed but not solved, there is a good risk-to-reward trade to be made here.

While you can’t trade the VIX directly, you can use one of several liquid ETFs that track the Volatility Index. The most popular and most liquid choices continue to be the VXX (iPath S&P 500 VIX Short-Term Futures ETN), which tracks the near-term futures, or the VXZ (iPath S&P 500 VIX Mid-Term Futures ETN), which tracks VIX mid-term futures.

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.

“Life is a series of natural and spontaneous changes. Don’t resist them — that only creates sorrow. Let reality be reality. Let things flow naturally forward in whatever way they like.”  — Lao Tzu

They’re back.

That same gang of market overlords who so badly botched the ratings of billions upon billions of dollars in sub-prime loans during the new millennium ’s first decade can be found once again front and center of a new action that could send the market into a serious tailspin.

Except this time, they might actually be getting it right.

In a report released after Friday’s market closing, and one that will be studied closely by analysts and investors, Standard & Poor’s continued to roil the European Union with its latest round of downgrades.

In spite of herculean efforts to defend its monetary and fiscal condition, France found itself on the receiving end of an S&P smack down. The triple-A credit rating that the French government brandished like a badge of honor was unceremoniously taken away, replaced with a slightly less shiny double-AA-plus, with the additional insult of a negative outlook added for affect.

During a press conference on Monday, France’s beleaguered President, Sarkozy, insisted the ratings agency’s action wouldn’t impact France’s economic policy or decisions.

Maybe, maybe not.

What it could do is affect the cost of borrowing for the euro-zone’s number two economy, and that’s something that would have a direct impact on France’s financial affairs.

Is the downgrade deserved? Arguably, yes, at least according to S&P. It seems that the ratings agency isn’t quite convinced that many of the downgraded countries, including France, have taken sufficient action to “address ongoing systemic stresses in the eurozone.”

In plain English, all the EU countries that were taken down a notch besides France, including Austria, Malta, Slovakia and Slovenia, as well as Spain, Italy, Portugal and Cyprus, which were taken down a pair of notches, aren’t really earning enough to pay off either their current or projected debts.

And, with the flawed “en vogue” opinion that fiscal austerity will somehow reverse this situation currently holding sway, it is unlikely that the euro-zone will avoid a recession, if not an outright disorderly dismantling.

So now Wall Street and the European bourses will figure out if these new ratings have been adequately “baked in” to the current price of the equity market or if a further price adjustment to the downside will be warranted.

Should investors decide that more heat needs to be added to the recipe, it will strongly influence the direction that the market will trend for the first half of 2012.

 What the Periscope Sees

 At the birth of the New Year, the Periscope took a peak out towards the investment horizon of 2012. Here’s a quick recap of the ETFs that were picked:

 EUO (Proshares UltraShort Euro) serves as a good way to play Europe to the downside. EUO tracks the euro and corresponds to 2x (-200%) the opposite of the daily performance of the U.S. dollar price of the euro. Year-to-date, it is up 5%.

FXI (iShares FTSE China 25 Index Fund), tracks the FTSE China 25 Index, and, made as a short play, offers an opportunity to bet that the China bubble may be due for a pop. YTD, down 6%.

GLD (SPDR Gold Trust), which tracks gold bullion, is the ETF of choice for many gold traders and investors, many who feel that gold has corrected adequately and has found a new base of support. YTD, up 5%.

AMJ (Alerian MLP Index ETN) tracks the Alerian MLP Index. MLPs (Master Limited Partnerships) were created as a tax incentive for energy investors during the Reagan years. Alerian remains a solid play on the MLP energy sector. YTD, down 0.1%.

This foursome, which serves as something of a “multiple-pairs trade,” remains as a reasonably good play for the moment, as it just may be able to handle whatever the market tosses its way.

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.