Damage Control For ETFs

The major index ETFs managed some damage control over the past week to reduce the losses sustained in the month of August to -5.65% for the S&P 500, which was its worst month since May 2010.

It could have been a lot worse, as fears that the economy was headed back into a recession, along with worries about the European debt crises, occupied traders around the world all month.

Optimism that the Fed will eventually lend assist again pulled the major market ETFs out of the doldrums over the past 7 trading days. With light volume and a host of crucial economic reports still on the agenda for this week, it remains to be seen whether this rebound actually has legs or turns into another head fake.

The big 4 reports (weekly jobless claims, productivity gains, ISM manufacturing index and motor vehicle sales), all due out tomorrow, will set the tone at least for one day until Friday’s all important jobs report will be published.

Here’s where the jobs numbers can get downright perverse.

If the numbers are much worse than expected (less than 100k), you’d expect the markets to correct sharply. While they may do that, there is also the possibility that a rally may ensue, because of the now increased hopes that the Fed will be forced to throw another stimulus package on the table in September to assist the ailing economy. Whatever assist they come up with, chances are that it will aid Wall Street and not Main Street just as we’ve seen last year.

Be that as it may, right now is still the time to observe how this week will play out, before making portfolio adjustments. Barring any unforeseen circumstances, I will hold on to our hedge (which gained slightly from yesterday’s close) until after Labor Day.

My guess is that not too many traders will want to go into a 3-day weekend with long positions, as negative news out of Europe can be the unknown force that can pull the rug out from under current bullish sentiment at anytime.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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