ETF Periscope: As Wall Street Eyes Earnings, This is a Good Time to Place a Bet on Eurozone

“One’s destination is never a place but rather a new way of looking at things.” — Henry Miller

Investors seemed to have regained their collective mojo, powering the S&P 500 Index (SPX) back up to the 1400 mark for the first time in three weeks. The upward move by SPX was fueled mostly by better-than-expected first quarter earnings, which increased the bottom line for the benchmark index by 1.8% on the week.

Will 1400 now serve as a new level of support or morph once again into a hard line of resistance? It has been over four years since the SPX has spent any sustained amount of time over that level. At the moment, it would likely require a significant alignment of the stars for 1400 to become the new support line.

What would such an alignment look like? Certainly, a continued stream of positive earnings would be a requirement. This is a possibility, because the bar of expected earnings seems to be leaning towards the low side. So this aspect of the equation seems as if it could happen.

The next required ingredient for a rising equity market would be positive numbers on the domestic economy. The first quarter drop in the GDP to 2.2% from last quarter’s 3% obviously reflects a certain level of cooling of the economy, though both consumer consumption and consumer confidence showed higher numbers than the previous month. This week’s economic report on jobs could serve as the tipping point in regard to how investors view the health of the U.S. economy.

However, what must be heavily weighted in the equation is the fate of the Eurozone. This past week investors seemed to look past the current signs of further problems developing in the troubled region. Spain has replaced Greece as the poster child for sovereign debt concern.  With a significantly larger economy and with a number of other Eurozone banks retaining a high level of exposure to Spanish debt, Spain has emerged as a much larger concern to both regional and international investors.

Standard and Poor’s just downgraded Spain’s debt several notches, blaming the probability of Spanish banks defaulting as the cause of that action. In addition, the unemployment rate now stands at a whopping 24% overall. Worse still, this number is dwarfed by the nearly 50% of unemployment that exists for those under the age of 24. These are simply unsustainable numbers, as are the rising bond yields that Spain is now forced to pay for credit.

The dilemma that Spain now faces is one of austerity verses growth.

It is a reoccurring theme among the Eurozone countries, and one that the current round of regional elections is attempting to address. The problem is, either option is merely a symptom of the EU’s structural problem, not a cure. Investors will probably see increased risk in the region, no matter how the current situation plays out.

What the Periscope Sees

With the market currently in a slight upswing bringing down volatility levels as reflected by a drop in the VIX, this is an opportune time to take advantage of the lower price levels of the “fear index” and pair it up with a proxy for the Eurozone situation. By going long a VIX derivative such as VXX, and pairing it with one for the Eurozone, such as EWG (iShares MSCI Germany Index Fund), you can benefit if the market continues to ignore the sour Eurozone picture while also having a strong hedge, via VXX, should the Eurozone resume its unraveling process.

Note, please, that in this case, both components of the pair are “long.”

ETF Periscope

Full disclosure:  The author does not personally hold any of the ETFs mentioned in this week’s “What the Periscope Sees.”

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