ETF Midweek Peek: A Dangerous Market For Everybody

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Includes: FXE, UCO, USO
by: David Fry

Bulls have had an easy go for an extended period. Miraculous explosive intraday rallies have bought back overnight or previous day's selling. However, there seems to be a change in the tide. Even the miraculous rallies are being sold off immediately damaging the perception of invincibility of the bulls. Permabulls will always be permabulls and the overnight drop to 1320 support on the S&P will bring new encouragement. This morning's housing data was a mixed bag, but the permabulls only see green, so they'll be encouraged.

Europe remains a ticking time bomb. The Greek disaster having passed with little or no pain, Spain seems like a slam dunk to the ever hopeful. With Greece's inability to form a government, the ECB and IMF can just "force" them to take the bailout money regardless of their meeting austerity measures agreed upon. Permabears and the Nostradamus's (Nostrodomusi?) scramble for headlines to be the first to say "I called it" with each bit of bad news or down tick in the markets. CNBC is keeping Nourial Roubini on ice in the Green Room - "just in case".

It's a dangerous market for everybody. Short sellers can get crushed in a 100 point rally on the Dow in 30 minutes. Long term investors see their portfolios bleeding at a net loss day to day. Technical analysts can't make accurate market surveys with massive central bank intervention and its unpredictability driven by political careers.

Fundamental analysts make claims, "The valuation of the market is cheap" - and then it gets "cheaper". Even with triple digit daily swings on the Dow, the Volatility Index (VIX) still remains relatively low having just inched over the fear level of 20.

Let's get to the tables to dissect this week's market activity.

Top Performer This Week


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The VIX rising off comatose lows, drives the volatility related ETFs to the top of our table this week. Options expiration on May 19th is likely to bring more of this as option traders will be hyper vigilant in this significant market move over the past two weeks. As the currency printing facets of the world face inflation, China is on the other end of the stick with deflationary fears as their economy continues to shrink.

China, being over-weighted in emerging market ETFs, draws the entire sector down with it. However, the other countries of emerging markets are highly commodity dependent and the rise in the Dollar has hit them hard as well. The JP Morgan fiasco rippled across all the big banks driving the financials down - already nervous over European debt.

New Highs


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U.S. Treasuries are the best house in a bad neighborhood. The 10 and 30 year yield are at new lows and prices have broken above range. With TIPS being the most overbought in the crowd, traders are assuming inflation ahead and probably a QE3 in the works as global markets continue to sink.

Don't get too excited over this, though. It's only 13% off its 52 week low.

New Lows


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Gold miners have been in a free fall for months. This is not a "new" reaction to the recent down trend in the overall market. The whales that hold or sell gold are now divided with two parts: dumping it on instability and the other half buying on inflation fears.

No surprises to see Spain and Italy hitting new lows as their debt yield rises to fearful highs. Speculators anticipated the next "bubble" to be U.S. Treasuries and a quick explosion. With the opposite happening, the upward move in treasuries has had the added fuel of short covering and selling of the inverse treasury ETFs.

Unusual Volume


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This morning's volume movers are telling. As the market gets a morning lift, traders are taking advantage of the situation to sell issues in Spain and Italy. Ultra high risk gets the attention of scalpers in gold miners and fast trades in gold. Those looking to get in for a fast short of the S&P take advantage of the lift to buy the 3x leveraged SPXU.

Those giving up the ghost after losses taken over the past several days are making a quick shift to safety in high yield issues and preferred. Risk on/risk off, is now in three hour cycles.

Overbought


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The rising Dollar has made shorting precious metals a no-brainer. The other no-brainer has been the short Euro position for nearly a year. This has been a "must have" position for virtually every hedge fund. God help us in the highly unlikely event of a short squeeze on the Euro.

Oil, which had held up best in the commodity sector, finally gave up the ghost and had a hard, fast selloff. Short sellers in oil had been like vultures perched on a branch waiting for this move, accelerating its downward thrust.

At the bottom of our list is long term treasuries which have crossed the threshold of being overbought. There's still a lot of real estate to cover in the overbought territory for TLT and it can remain overbought for extended periods.

Oversold


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Brazil is in a world of hurt with commodity prices tanking and their own internal currency problems. Volatile silver gets easily trounced in market weakness. Crude dominates the oversold table this week, but it will be what to watch (NYSEARCA:USO) & (NYSEARCA:UCO) at the first hint of QE3.

Although the Euro (NYSEARCA:FXE) is at its most oversold condition in nearly a year, pops in the Euro have done little to alter the long-term down trend. The Euro is a direct correlation to the Dollar and the Dollar is facing minor resistance right now at 82.

A headline of "good news" out of the Eurozone could give the Euro an easy pop.

Trending Up


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Our up trending positions offer little encouragement of market and economic conditions. Shorting the Euro in crisis certainly is negative for Europe. Biotech is a defensive sector as well as the consumer staples in a weak market. Even though consumer / retail numbers have come in relatively positive, much of that is inflation driven.

It is also important to note, that although retail hasn't broken it's long term up trend, it has rolled over in the past month. Home construction is actually apartment building and condo conversion to rentals but it still a good thing this sector is getting some work having been decimated over almost five years. In a market turn around, rental REITs should be on your watch list.

Yield hungry investors have sought high yield ETFs jockeying between them to capture capital gains as well. Among the "most favored" status has been the MPLs, with AMPL the top of the heap. AMPL has been in a decline over the past quarter which simply means the yield is rising. This will be another for the watch list (currently yielding 6.22%) as the market finds a bottom.

Trending Down


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Surprisingly, we have only four issues on our down trending table this week in light of the decline in the market. Natural gas, gold miners and the Euro have been in an extended down trend and continuing. Which is interesting to note is that the Dow is the last of the major indices to roll over, although the Dow inverse has chalked up positive gains for the past quarter.

In summary, the ever exuberant bulls will look for any green cape to charge. An overnight low at yesterday's intraday low was a technical victory. Dismissing poor data in building permits, housing starts positive number gave the bulls the "all clear" and all that was needed was a hammer candle on the minute chart to start the run. A reasonable expectation of massive miracle money hitting the market at the close of Europe, (previously scheduled for 10:00) is the bull-run trifecta for today. However, it's all just fun and games until the Fed minutes release at 2:00 and Chairman Bernanke has usually holds a press conference after the release.

All eyes will be on the Fed looking for a hint toward QE3. Every word will be dissected by the media and his beard will be under the microscope looking for crumbs. All of this is rightly so and justified in that the market has been entirely dependent on "free" money from the Fed and is now jonesing like a heroin addict for another "fix".

It sums up to my initial premise, "It's a dangerous market for everybody". Europe in crisis, China shrinking and current market direction is extremely negative. On the other side of the coin, markets always rise in front of a presidential election, the media is always bullish and can pound rumors as "news" to push markets and the Fed always seems to "fix" things at critical market levels.

For long term investors, trust in market internal functions is lost. This last debacle with JP Morgan losing two billion dollars was just another thumb jammed in their eye and confirmation that markets are unreliable. Redemption from the market (mutual funds and ETFs) has been massive over the past year. This basically leaves central banks, high speed algorithm programs and adrenaline junkie day traders in the market. If you're a fan of Capone's Chicago, this is the place for you. If not, the only thing to watch is the Fed's QE3 for a turnaround in commodities, hopeful capital gains on high yielders and rental REITs.

Until then, cash and treasuries look to be the only safe hiding place.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.