“People have to talk about something just to keep their voice boxes in working order so they’ll have good voice boxes in case there’s ever anything really meaningful to say.” — Kurt Vonnegut
Investors seem ready to forgive and forget a lot of the problems that inhabited the 2012 equity market.
And why not?
China is sending signals that its slowdown is basically slowing down; the Eurozone is somehow momentarily managing to keep from generating negative headlines. Even Washington has tamped down on the nation’s anxiety levels following the fiscal cliff turmoil, at least until the next drama of the debt ceiling heads towards critical mass sometime in the next two months.
Of at least equal importance is the fact that the straight economic data, such as housing starts and jobs reports, have basically avoided shocking Wall Street. Keeping things moving along the same lines, the first round of corporate earnings reports for the recent fourth quarter seem to be hitting most of the right numbers, thought those expectations are generally regarded to be towards the lower end of the earnings bar.
It may prove to be the perfect set up, in more ways than one. The question is, is it a set up for a strong move past five-year highs, or one ripe for a contrarian move towards correction territory?
From the contrarian perspective, the fact that the S&P 500 Index (SPX) is presently sitting at levels last seen prior to the 2008 crash would be well worth noting, but not necessarily significant by itself.
What adds some heft to this perspective is the fact that a massive amount of money has been pouring back into the equity market, in the form of ETFs, mutual funds, and stock funds in general.
But wait, there’s more!
The CBOE Volatility Index, not so affectionately known as “the fear gauge,” currently sits at a nearly six-year low, having dropped about 25% since Christmas Eve day.
Fear is low, complacency is high.
In other words Main Street seems to be feeling a little bit better about diving back into the market. And, sadly, it is at such moments that Wall Street often finds itself near the end of a run up and close to a bout of correction.
At the very least, it is a perfect time to score some volatility protection into almost anyone’s portfolio. This way, if the market continues to uptrend, you can take advantage of the alpha. If a correction becomes the next phase of the market, you have purchased some portfolio insurance when it is at a relatively low cost.
So the trade-off is whether to sacrifice some potential profit in exchange for perhaps a better night’s sleep. You make the call.
What the Periscope Sees
This past week, the second of the New Year, the Technology Sector can be found atop the Sabrient SectorCast ETF Rankings. 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.
Here is a list of some of this year’s top performing Technology Sector ETFs to date, as of the second week of January:
FDN — First Trust Dow Jones Internet Index Fund, +5.00%
SMH — Market Vectors Semiconductor ETF, +4.83%
QTEC — First Trust NASDAQ-100 Technology Sector Index Fund, +4.37%
IGV — iShares S&P GSTI Software Index Fund, +3.93%
MTK — SPDR Morgan Stanley Technology ETF, +3.85%
As an alternative to buying the ETFs themselves, consider long call options as a way to leverage your portfolio’s funds. For this purpose, you could use April expiration calls and going several strikes out-of-the-money. Though you are certainly paying a premium when buying any options, volatility levels are, broadly speaking, relatively low, making it a reasonably good time to purchase long calls.
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.