“Mastering others is strength. Mastering yourself is true power.” — Lao Tzu
However the banking debacle in Cyprus plays out over the next few days and weeks, it should serve as a reminder that, economically speaking, much of Europe remains on shaky ground.
And with recent GDP numbers for the area indicating the Eurozone remains firmly ensconced in recession, expected to shrink 0.3% in 2013 according to the European Commission (EC), investors could hardly be blamed for swapping out their recent state of complacency for a higher state of alert, at least in regard to that region’s short-to-medium term economic health.
Though the bottom line on the week was that Wall Street’s major indices ended up relatively close to where they started, with the Dow Jones Industrial Average (DJIA) down 0.6% and the S&P 500 Index off by about 1%, last Monday’s volatile market reaction to the Cyprus “event” was quite telling.
It seems that the Eurozone’s sovereign debt crisis, a staple of market drama for much of 2012, can return to the forefront of the collective investor memory bank at the drop of a reminder that the region can be at times incredibly myopic.
How else can one explain the decision of the Cyprus government to state its intention of imposing a levy on depositors’ bank accounts? Did the leadership team involved in that decision process really believe that the international investment community would applaud the move?
That answer will likely be found once the results of any brokered deal between Cyprus and the “troika”— the European Central Bank (ECB), the International Monetary Fund (IMF) and the EC —come to light.
Since Cyprus effectively needs a $13 billion bailout from the troika just to keep its banking system from collapsing, it finds itself with little leverage and even fewer options. And the troika has apparently been insistent that Cyprus comes up with approximately $7.5 billion in order to access the $13 billion of bailout money.
But it would be hard to see how a de facto insistence by the troika that Cyprus impose a virtually unprecedented set of rules upon its banks’ depositors, both national and international, could turn out well for the IMF, the ECB, the EC, or really, anyone at all.
So let’s assume for the briefest of moments that, similar to the recent Washington fiscal cliff sturm und drang, cooler heads actually prevail, and that some resolution emerges that puts the Cyprus drama to rest, at least for the short term.
It still will have served as a reminder to Wall Street that the Eurozone is just a shout away from the next impending crisis. Quite rightly, investors might take a closer gander at the recent spate of negative projections for the region’s economy.
According to the latest composite Purchasing Managing Index (PMI) numbers, which provides a fairly good reading on the health of the region’s manufacturing sector, the 17 countries that comprise the single currency area collectively suffered its sixth contraction in a row. Taken together with the EC’s most recent projections, indicating the Eurozone’s current recession will likely remain in place for at least the remainder of the year, investor sentiment should be set to wary.
Ergo, the Eurozone should be regarded as a region with a high chance of increasing volatility, making it a reasonably good shorting opportunity.
For fans of ETFs, one could utilize EZU (MSCI EMU Index Fund), which tracks the MSCI EMU Index, as the vehicle of choice for the short play. The MSCI EMU Index measures Eurozone equity market performance.
But what about the bullish market currently trending? What if the trend holds and you are left at a loss on that Eurozone short?
You could balance that off as a pairs-style trade with none other than the once-and-future Wall Street darling, Apple (AAPL).
In addition to the uber cap’s huge cache of cash, the strong brand recognition, devoted customer base, and relatively low P/E, Apple is currently establishing some technical attributes that warrant consideration.
For the first time since October of last year the company finds itself atop its 50-day Moving Average. This may be taken as an indication that the stock has recovered from its December “death cross,” when its 50-day MA fell below its 200-day MA. (The stock then proceeded to drop by about 30% over the subsequent three months.)
In addition, Apple seems to have found support at $425, so the current entry point, around $460 as of last Friday, could be seen as a reasonably attractive risk-to-reward opportunity for traders, as $525 is the next likely level of major resistance for the stock. It is worth noting that, over the course of the last month, the stock has broken out of a six-month downward trend, adding over 9% to its stock price in the process.
Bottom line: Go long Apple, and short the Eurozone.
What the Periscope Sees
The Sabrient SectorCast ETF 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. Once again, the Technology Sector is affixed atop the leaderboard.
Here is the updated list of the year’s top performing Technology Sector ETFs year-to-date, as of the third week of March:
SOXX — iShares PHLX SOX Semiconductor Sector Index Fund, +12.22%
FDN — First Trust Dow Jones Internet Index Fund, +9.98%
PSCT — Power Shares S&P 500 SmallCap Information Tech Portfolio, +9.38%
IGV — iShares S&P GSTI Software Index Fund, +9.03%
FXL — First Trust Technology AlphaDEX Fund, +8.49%
SMH — Market Vectors Semiconductor ETF, +7.83%
QTEC — First Trust NASDAQ-100 Technology Sector Index Fund, +7.81%
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 either Daniel Sckolnik or Sabrient. Neither Daniel Sckolnik nor Sabrient makes any 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.