David Chojnacki S1F Market Technician
With the debt deal in Washington signed and a bump in prices in the prior session, investors were ready to sell the news at the open. After a brief sell-off at the open, the indices quickly reversed course and began a steady move to the upside. The exception was the DJIA, which remained in negative territory, hampered by IBM which was trading down 6% on weak earnings. By the final bell, the averages were near their highs of the session. At the close, the DJIA was off 2.1 points, the S&P up 0.67%, and the Nasdaq100 gaining 0.6%. Breadth was decidedly positive, 5 to 1, on average volume. RSI's moved to the upside and are in the 60's for the Nasdaq100 and S&P. ROC(10's) declined, but remained in positive territory. The Nasdaq100 closed at a new 13 year high(3301.6), which was its high of the day. It closed right at a projected resistance level of 3302. The S&P's strength was similar, in that it closed at a new all-time and the high of the session. As noted earlier, only the DJIA did not close at a new high, hampered by IBM. The recent previous DJIA closing high in September was 15676. Even without drag of IBM, the DJIA would not have made a new high. The VIX dropped 8.3% to 13.48, continuing its volatile moves. The S&P near term support is now at 1725-30 and 1712. Near term upside resistance is at 1737-40 and 1750. The Nasdaq100 now has near term support at 3300-02 and 3285. Near term upside resistance now sets up at 3312 and 3325. European markets are higher this morning, while the Nikkei closed slightly to the downside. Earnings will take front and center with the fiscal deals out of the spotlight. Mixed results on recent reports with GE underperforming and MS outperforming. Futures are slightly higher this morning versus fair value in pre-market trade.
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TODAY'S DATE, UNLESS OTHERWISE INDICATED
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Data sources include ETF Database, ETFTrends.com, IndexUniverse.com, Google Finance, and Bloomberg data and at times other data sources are utilized. Leveraged, Inverse & Leveraged Inverse Conclusions and Risks 1) Leveraged, Inverse, and Leveraged Inverse (L&LI) ETFs generally capture a high percentage of their expected daily returns, particularly on a net asset value basis. 2) L&LI ETFs are not appropriate for all investors. However, we believe they can be appropriate tools for some investors looking to make short-term tactical trades if they perceive a high likelihood of a strong market move occurring in a relatively short time period. In strong trending markets, being on the right side of the "trade" with L or LI ETFs can lead to very strong returns. 3) Investors should not expect these ETFs to deliver total returns linked to their benchmarks over any period other than daily. The effects of compounding and the daily re-leveraging or de-leveraging that occurs with L&LI
ETFs can lead to unexpected results over the long term. As a result, we believe longer-term investors should consider regularly rebalancing positions. 4) Trendless markets, particularly those with a high level of volatility, can lead to substantial relative underperformance of L&LI ETFs. 2) Leveraged and Leveraged Inverse (L&LI) ETFs typically utilize futures and equity swap agreements. The use of these derivative instruments increases risk and enhances the possibility of tracking error.
Relative to traditional ETFs, leveraged, inverse and leveraged inverse ETFs typically have higher costs and lower tax efficiency. 3) The effects of compounding can lead to significant deviations from traditional benchmarks over longer time periods. For example, if $100,000 is invested in an index that increases in value by 10% on day one and then decreases in value by 10% on day two, the investment will be worth $110,000 at the end of day one and $99,000 after day two. However, the value of a security that doubles the daily performance of the index would be worth $120,000 on day one and $96,000 after day two. Thus, the index is down 1% after two days, a doubling of which would be down 2%. However, the security attempting to double the return of the index is down 4%. Investors should consider carefully the potential impact over longer periods. MLP and MLP ETF Risks Individual MLPs are publicly traded partnerships that have unique risks related to their structure. These include, but are not limited to, their reliance on the capital markets to fund growth, adverse ruling on the current tax treatment of distributions (typically mostly tax deferred), and commodity volume risk.
For tax purposes, MLP ETFs are taxed as C corporations and will be obligated to pay federal and state corporate income taxes on their taxable income, unlike traditional ETFs, which are structured as registered investment companies. These ETFs are likely to exhibit tracking error relative to their index as a result of accounting for deferred tax assets or liabilities (see funds' prospectuses). The potential tax benefits from investing in MLPs depend on their being treated as partnerships for federal income tax purposes and, if the MLP is deemed to be a corporation, then its income would be subject to federal taxation at the entity level, reducing the amount of cash available for distribution to the fund which could result in a reduction of the fund's value. MLP funds accrue deferred income taxes for future tax liabilities associated with the portion of MLP distributions considered to be a tax-deferred return of capital and for any net operating gains as well as capital appreciation of its investments; this deferred tax liability is reflected in the daily NAV; and, as a result, the MLP fund's after-tax performance could differ significantly from the underlying assets even if the pre-tax performance is closely tracked. Commodity ETF Risks Commodity ETFs may be subject to greater volatility than traditional ETFs and can be affected by increased volatility of commodities prices or indexes as well as changes in supply-and-demand relationships, interest rates, monetary and other governmental policies, or factors affecting a particular sector or commodity. Currency ETF Risks Investments in currency involve additional special risks, such as credit risk and interest rate fluctuations. ETFs mentioned at times may have material exposure to small cap and/or international securities that may have higher levels of risk and volatility than other ETFs.
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