“The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand. ” – Sun Tzu
The cockiness that has been on display from Wall Street for much of the year seems to be on the wane.
For a while, specifically for the first three months of the year, investors seemed to shrug off any negative news, instead taking every opportunity to buy the dips and ride the trend. Sentiment seems to have shifted in April, however, and the skittishness that was the hallmark of the second half of 2011 has re-established itself, to a certain extent, as soon as the second quarter of the year came into being.
The Eurozone debt crisis has seemingly reasserted its prominence on the trading floor. The lull that was established, primarily due to the effects of the temporary banking liquidity solution provided by the European Central Bank’s LTRO-1 and 2, has apparently dissipated. Instead, it has been replaced, as of last Friday, by the jolt of increased bond yields in the Eurozone’s periphery markets. Specifically, Spain’s 10-year bonds hit 5.93%, dangerously close to a level that is euphemistically referred to as “unsustainable.”
Taken together with the fact that China has just demonstrated what many economists have already, that it is as susceptible to an economic slowdown as the rest of the planet, investors are rethinking their happy faces towards the equity markets. A first-quarter drop in the world’s second largest economy from 8.9% to 8.1% GDP tends to have that sort of unsettling effect.
How did Wall Street handle this adversity? Not so well.
The Dow Jones Industrial Average (DJIA) lost 1.6% last week, its biggest fade in over three months. The S&P 500 Index (SPX), offering a better read on the market as it represents 500 companies as opposed to the 30 that compose the Dow, got dinged as well, to the tune of 2% on the week. Finally, the Nasdaq Composite (COMP) trumped them all, shedding a nasty 2.3%.
For the coming week, it will be telling to see how investors view the market. Will it be seen through the prism of an opportunity to cash in the chips on a profitable year to date, or a chance to buy the pullback?
One x-factor is China’s decision to widen the yuan band. This apparent effort to enhance its currency’s flexibility can be read in a variety of ways, covering the spectrum from a move to transparency all the way to the other side where suspicions lurk as to real motive of a government that has been notoriously unconcerned with accommodating the demands of its global trading partners.
If good news emerges from the next round of corporate earnings reports, the yuan announcement may simply get relegated to the back of the curio shop, at least for now. On the other hand, if more bad news comes out of the peripheral countries of the Eurozone, and U.S. economic data begins to illustrate a loss of steam in its recovery, then China and its currency maneuvers may come under harsher scrutiny for no other reason than the fact that uncertainty loves company.
What the Periscope Sees
It’s probably safe to say that a huge amount of retail equity investors are unfamiliar with China investments. Aside from the rare high-profile name such as Baidu, Inc. (BIDU), the Chinese language Internet search giant, the China market remains mysterious. With the recent news regarding the expansion of the yuan band, however, together with a lot of news coverage focusing on the drop in China’s GDP, it may be a good time for traders and investors to familiarize themselves with some trading vehicles from that region of the globe.
Here are trio of ETFs that have been successful so far for the year. However, if a correction starts to become obvious in the market in general, then these may become prime candidates to go short.
HAO, China Small Cap ETF, tracks the AlphaShares China Small Cap Index. It is currently up over 14% for the year.
GXC, SPDR S&P China ETF, tracks the S&P China BMI Index. It is up nearly 12% year-to-date.
Finally, EWH is up over 12% for the year, and tracks the MSCI Hong Kong Index.
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.