By several measures, investors are every bit as afraid today as they were in the first week of October, when U.S. stocks had reached 52-week lows. Yet the S&P 500 is 11.5% higher than it was on 10/3/11.
How can we tell that investors are still petrified? They’re flocking back to the perceived safety of the U.S. dollar and piling back into U.S. treasuries.
ETF enthusiasts can see this fear-induced activity in PowerShares DB Dollar Bullish (UUP) as well as the iShares 7-10 Year Treasury Bond Fund (IEF). The current price for each safer haven is above a 50-day trendline.
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In addition, if investors were genuinely comfortable with the pace of progress in Europe’s debt talks, one might expect the euro-dollar to attract interest. Instead, the euro via CurrencyShares Euro Trust (FXE) is hitting 11-month lows. Also, the current price for FXE is well below a 50-day moving average (MA).
Clearly, investors are not yet satisfied that Europe will be able to achieve its stated goals of greater unity and stronger fiscal discipline, let alone have the firepower to bail out banks. What’s more, the yields on Italian bonds and Spanish bonds are still at levels that have been widely criticized as “unsustainable.”
However, there’s one measure of fear that is actually suggesting the opposite. That is, volatility via the iPath S&P 500 VIX Short-Term Futures (VXX) has been subsiding. In fact, the current price on VXX is comfortably below a 50-day MA. Moreover, VXX is nowhere near the price level it managed to reach in early October.
It is almost as if the CBOE Volatility Index (a.k.a. “fear gauge”) isn’t quite capable of signaling fear or complacency as it has in the past. Could it be that, even with a panicky, “risk-off” investment community, we are growing more accustomed to volatility itself?
It is true that volatility ETNs could still spike dramatically. In fact, the appearance of calm in this arena may be little more than a mirage.
Nevertheless, even the most modestly positive overture out of Europe has been able to spark interest in risk assets. Let’s remember that China has shifted to an accommodative monetary and fiscal stance. That’s bullish for commodity demand as well as resource-rich exporters like Brazil. Additionally, the U.S. economy may be growing slowly, but it is growing. And S&P 500 corporations continue producing record profits.
The micro- and macro-economic positives may not be able to overcome the severity of the mess in Europe. Yet I believe we are more likely to see erratic price swings in both directions. Consider acquiring dividend funds like Vanguard Dividend High Yield (VYM) on the dips, as well as closed-end covered call funds like Eaton Vance Tax-Managed Global (EXG). The latter has an income stream that may make up for the tug-of-war over market direction.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.