Is an Overheated Market About to Let Off Some Steam?

 

Hesitation increases in relation to risk in equal proportion to age.” — Ernest Hemingway

 

Wall Street is on a nice little run at the moment, precisely the sort that is almost too seductive to avoid. So does that in fact make it the time to avoid it?

Maybe, maybe not. Yet bandwagons should be, at the very least, soundly considered prior to hopping aboard one.

It’s a fact that the major indices are up over 5% on the year to date, the CBOE Volatility Index, AKA “the fear gauge,” continues to hover near six-year lows, and recent economic reports, such as Friday’s data revealing a 21% drop in the U.S. trade deficit, has trended mostly positive. As well, the current earnings season, continuing in full swing, has basically offered up reports that have been mostly in line with investor and analyst expectations.

True, the Dow Jones Industrial Average (DJIA) fell just short of running its winning streak to a sixth week, falling 0.1% into the red, but that’s hardly a number to fret about. On the other hand, the S&P 500 Index (SPX) did manage to make it six in a row, as it ended the week up 0.3%. The SPX ended Friday at 1,517, a five-year high. So, too, did the Nasdaq Composite Index (COMP), which added 0.5% to its bottom line. In addition to the Nasdaq extending its winning streak to six, it ended the week at its highest levels since the end of 2000.

All of these events, regardless of the factors behind them, do add up to an upbeat sentiment. In addition, there simply has been little in the short-term global economic picture to scare money away from equities.

So why should anyone be worried? The trend is your friend, right?

Of course. Until it’s not.

A few factors that might deflate the market balloon might include, either separately or collectively, a spate of sour economic reports from the government, a failure of Congress to stop its own rather absurd sequester creation, or extreme impact from the “big freeze” currently hitting the country’s Northeast Corridor.

Additionally, investor sentiment could see a sudden shift over fears that Europe will slip into a down spiral as a result of its ill-conceived dive into the austerity waters, a move that has Britain economically reeling and the Eurozone treading water at best.

Most likely what will happen is a combination of some news-based flip of investors from complacency to fear, just enough to create a strong round of profit-taking.

At that point, a reassessment of fundamentals of the market might emerge, trumping any pure sentiment trend.

It’s a good time to hedge, in other words. But really, when isn’t?

What the Periscope Sees

The Technology Sector once again sits atop the Sabrient SectorCast ETF Rankings leaderboard. The Rankings rate each of the ten U.S. industrial sector iShares (ETFs) by Sabrient’s proprietary Outlook Score and are revised on a weekly basis.

Presented here is an expanded list of some of this year’s top performing Technology Sector ETFs to date, as of the first week of February:

SOXX — iShares PHLX SOX Semiconductor Sector Index Fund, +10.84%

FDN — First Trust Dow Jones Internet Index Fund, +10.34%

SMH — Market Vectors Semiconductor ETF, +9.16%

FXL — First Trust Technology AlphaDEX Fund, +8.35%

IGN — iShares S&P GSTI Networking Index Fund, +8.32%

QTEC — First Trust NASDAQ-100 Technology Sector Index Fund, +7.78%

IGV — iShares S&P GSTI Software Index Fund, +6.70%

MTK — SPDR Morgan Stanley Technology ETF, +6.17%

IGM — iShares S&P GSTI Technology Index Fund, +5.96%

As an alternative to buying the ETFs themselves, consider purchasing call options as a way to leverage your portfolio’s funds. For this purpose, consider the use of May expiration calls, two or three strikes out-of-the-money.

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.

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