What a wild and wooly week its been so far. From state sanctioned theft (think Cyprus) to a looming Fed meeting. What’s a trader to do in a market like this?
Unless you are a very short term trader you may want to think about locking up some profits or getting a little defensive here. Stock prices still look like they have a SOME more upside in them, but not much.
It’s probably too early to get wild on the short side but you may want to think about parking some money into bond fund ETFs and putting some money into the U.S. dollar. I go into which ETFs to use below.
Now is the time for caution, short term bulls can buy the weakness for a trade but longer term players will want to be in cash or cash equivalents — because in my opinion, the drama from Cyprus hasn’t even begun yet.
iShares Russell 2000 Index Fund (NYSE:IWM)
On a pull back to $91-$91.50, short term bulls can get long the small caps for a potential pop to $96-$98 (perhaps even more if things get really irrational). Be sure to use a stop loss of $88.
The next two plays are for more conservative investors looking to profit from a “risk off” scenario under which the world starts fleeing to U.S. dollar-denominated assets.
PowerShares DB US Dollar Index Bullish Fund (NYSE:UUP)
Say what you want about the Fed and their policies and how bad it is for the dollar, this chart looks like it wants to go up. Expect the dollar to continue to catch a bid here. Are you going to see a massive move higher? Probably not but I think US Dollar will out perform just about every other major currency over the spring and Summer.
You can use UUP to get exposure to the U.S. Dollar Index which measures the value of the dollar against a basket of currencies. It is about 60% weighted against the Euro. So if you think the Euro is going lower you’ll want to buy UUP.
iShares Trust Barclays 20+ Year Treasury Bond Fund (NYSE:TLT)
This ETF gives you exposure to 20+ year Treasury bonds. It’s starting to look interesting again, especially if you believe that European woes will flare up. Use a pull back to $116 to get long with a $114 stop. If Europe implodes this goes back to $132, on a milder move you could still see this one hit $120-$122.