In this week's interview with Toni Turner of TrendStar Trading Group, we discuss the market's major sell-off, and where investors may hope to find support in the broader market.
EQ: Stocks are down over 3 percent since Ben Bernanke's press conference on Wednesday. Is this an overreaction from the market or were investors caught off guard?
Turner: I think the market is overreacting, though you could see bonds were falling pretty dramatically Wednesday afternoon as Bernanke was holding his press conference. So we definitely had a warning, and he even told us there was a timeline for slowing bond purchases and mortgage-backed securities. Frankly, the market just didn't like it. I've been using the analogy of a teenager whose getting his or her their allowance cut. It's never fun.
However, Thursday also showed that jobless claims rose, and adding to the angst, was the preliminary data released by HSBC that reported China's PMI slipped to a nine-month low. We also saw Brazil's drop due to their unrest, oil prices falling, and a sense that the world is really, on the whole, is looking at sluggish manufacturing numbers. When you combine those data with Mr. Bernanke's comments, I think a lot of people who have made profits in the market earlier this year may be just throwing up their hands and selling, saying it's enough because they don't want to take the chance of giving their profits back to the market.
EQ: Even with the volatility that we had seen over the last few weeks, the S&P 500 had held firmly above 1600. It broke below that on Thursday. What does that mean to you?
Turner: Well, holding above 1600 was optimal, but below that, I see support at 1580 and 1540. Of course, we want to see the Dow Jones Transportation Average Index and iShares Dow Jones Transportation Average (IYT) to remain at or above current levels at $109.
Certainly, if the S&P 500 drops, we don't want to see it confirmed by the transports as well. I think many people are taking profits from the bull market that we experienced through May, and if we fall another 2 to 3 percent, then investors may return to the market looking for new opportunities.
EQ: Are the volatility ETFs like the iPath S&P 500 VIX ST Futures ETN (VXX) a good place to look at right now?
Turner: The VXX tracks the Volatility Index on an intraday basis, which is good for one or two days of trading, but it's not meant to be used for the long term. If you look at the VXX on a chart that goes back to 2011, you can see it doesn't move in an exact pattern with the VIX over the long term.
EQ: So it's similar to the concerns of using leveraged ETFs in ways they weren't necessarily intended to be used?
Turner: What people have to realize with inverse leveraged ETFs is that they could be good vehicles to be used for day trading and possibly held overnight.
Anyone that gets into ETFs such as the ProShares UltraPro Short QQQ (SQQQ), which is the 3x inverse leveraged ETF that matches up with the Nasdaq 100, or the Direxion Daily Small Cap Bear 3X Shares (TZA), which is the 3x bear for the Russell 2000, need to know that these funds readjust on a daily value. What that means is if you were to hold them for a day or maybe the next day, and they stayed at the same price, your capital would drop because of the daily readjustments. So I would say to hold them no more than three days max.
I know people who have bought them, held them, and lost money just by doing nothing. It's not a good idea because these were not meant to be bought and held for any length of time.
We see inexperienced traders buy these inverse leveraged funds, and then maybe the trade goes against them. So, the trader decides to hold the fund, thinking it will move higher anderase their losses. But you have to realize that the whole time you're holding it, you risk two factors going against you: the movement of the underlying index moving against you, as well as your investment's value moving lower because the ETF is getting readjusted everyday like it's built to. We need to remember that in the hands of people who know exactly how they're built and how they work, these vehicles are fine. For people who don't understand them, they can be very dangerous.
EQ: Which sectors or industry groups look better than most for you at the moment?
Turner: It seems like we're throwing out all the babies with the bathwater right now, so I don't see much I'm willing to take on sectorwise, right now. I am, however, watching three agriculture commodities ETFs. Again, they should be played only by people who understand them. I'm watching right now are iPath DJ-UBS Livestock TR Sub-Idx ETN (COW), Teucrium Corn (CORN), and iPath Dow Jones UBS Grains Total Return Sub-Index ETN (JJG).
We have a drought in the Midwest and corn prices are down. There's more to it than that obviously, and people have to do more of their own research on these ETFs, but they have the potential to move go higher.