I Smell a Pullback

 | Apr 27, 2012 | 10:00 AM EDT  | Comments
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Stock quotes in this article:

MINT

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OFF

,

FSA

The stock markets have become bipolar as of late, oscillating between puzzling spikes and frustrating plunges. The market is seemingly stuck in a pattern of "two steps forward, one step back," which obviously produces a net positive effect and can be an ideal environment for those active traders looking to profit from short-term swings.

The major indices have just taken three relatively big steps forward, having posted big gains over the last three sessions despite a lack of any significant positive news or data releases. On Thursday the Dow jumped more than 100 points to put it comfortably above the 13,000 mark. I'm as pleased as anyone about the recent surge, as my portfolio is heavy on risky assets, but I have a sneaking suspicion that a slight downward correction is coming in the very near term.

My reasoning is based on the disconnect between excellent performance of late and the recent developments on the earnings and employment fronts, which have been less-than-stellar, to say the least. We've learned recently that the employment picture might be stalling: The Labor Department indicated that new applications for unemployment are near the highest level of the year. We've also seen some disappointing earnings reports from some major bellwethers in the past few days -- on Thursday Exxon Mobil (XOM) missed analyst expectations and European drugmaker AstraZeneca (AZN) slid after slashing expectations.

Wednesday's report from the Federal Reserve, moreover, wasn't exactly full of soothing news. The central bank is far from optimistic about the pace of recovery, and still anticipates keeping interest rates low throughout 2014. Throw in the lingering uncertainty over a eurozone that increasingly seems headed for a breakup -- word another Spain downgrade late Thursday certainly didn't help matters -- and the rally of the past few days seems to be a bit overdone.

I remain cautiously optimistic over the intermediate-term outlook for global equity markets, as there are encouraging signs in the manufacturing sector and indications that housing is recovering slowly but surely. But we've gotten a bit ahead of ourselves in the very short term, given the lackluster earnings season and slowing employment picture, with latter being of particular concern. In light of this, a pullback to close out this week and perhaps to open up next week is probably in the cards. For those looking to take shelter, here are a few ETF ideas scattered along the risk spectrum.

PIMCO Enhanced Short Maturity Strategy ETF (MINT): This ETF is the ultimate safe haven. It's essentially a money market fund that serves as an attractive place to park cash when one is anticipating turbulence in equity markets. MINT is one of the lowest-volatility ETFs out there, and sideways movements are pretty appealing when risky assets are heading south. For those looking to temper their risk exposure, MINT looks pretty nice right about now.

UBS Etracs Fisher-Gartman Risk Off ETN (OFF): This "risk off" ETN is a pretty unique product: it combines short positions in risky asset classes with long positions in safe havens such as sovereign bonds and developed-market currencies. The "risk off" name is actually a bit misleading -- there's plenty of volatility and risk associated with this product. It's perhaps more appropriately thought of as a tool for betting against global equity markets, as OFF is constructed to thrive when stocks slide.

FactorShares 2X T-Bond Bull/S&P 500 Bear ETF (FSA): This product is an extremely powerful tool for betting on a slide in stocks. FAS is designed to deliver daily results that correspond to 200% of the spread between Treasuries and the S&P 500. Because those two assets often move in opposite directions, FSA can be expected to feature some pretty serious volatility. But if U.S. stocks slide, that volatility will be to the upside -- and investors will be left with a smile on their faces.

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