2:30 pm ET: German chancellor Angela Merkel went on vacation yesterday; the market zooms up--coincidence? Actually, there may be a grain of truth to that conjecture as Draghi (head of the European Central Bank) is free to pretty much do as he pleases with little resistance. The markets are already pricing in the rumor of further ECB easing and what should worry investors now is a possible market sell-off once the rumor becomes fact (buy the rumor, sell the news). To protect investors from just such an event, media pundits are advocating protecting long positions by buying the VXX, a short-term VIX futures exchange traded note. This may turn out to be a great trade but for individual investors who may not understand the subtleties of exchange traded notes, I wouldn't advise it. (Buy puts on the SPY instead if you know how to trade options.)
The "risk-on" trade is in full gear today as the greenback continues its loss against other currencies. The Spanish and Italian country funds--the dogs of the international etf space in recent months--rebounded sharply today. The Spain fund (NYSEARCA:EWP) is up 5% while the Italian fund (NYSEARCA:EWI) is up over 3%. Dividend investors may wish to take a look at the EWP which is paying a hefty 12.3% yield. Remember, though, that increased yield doesn't come for free. Generally speaking, as yield increases, so does risk. On the other hand, if I had to pick between the EWP and the EWI (which is only paying a 4% dividend), I'd choose the EWP on a risk/reward basis. (I believe that if Spain defaults, so will Italy.) In any case, I'd advise investors to start out with a small position with incremental increases as the stock rises.
In sector news, biotechs continue to advance as the biotech etfs BBH and IBB continue to press to new highs. Despite disappointing news that consumer spending is slowing, the retail etf (NYSEARCA:RTH) was able to hit a new high along with two defensive sectors: utilities (NYSEARCA:XLU) and consumer staples (NYSEARCA:XLP).
Although the current market rally may not be destined to last, it is refreshing to end the week on a high note, especially considering that the opening ceremony of the summer Olympics is today. August is typically the designated vacation month on Wall Street and combining that with that fact that many will be tuned to Olympic coverage, I'm expecting volume to be especially light. What this means is that it will take less pressure to move the market in either direction meaning that far from being a walk in the park, August could well indeed turn into a rollercoaster ride. Hang on to your hats!