The past few years have brought a number of memorable headlines in the financial presses, from the optimistic to the downright demoralizing. But Thursday I saw what had to be the most amusing of them all: "U.S. Stocks Jump on Bad News." If that isn't proof that we are living in interesting and unpredictable times, I don't know what is.
The bad news being reported came in a number of different shapes and forms. Jobless claims in the U.S., the ongoing thorn in the side of the domestic recovery, unexpectedly jumped. Yields on Spanish and Italian debt surged amid intensifying anxiety surrounding the bailout(s) there. Even the private sector provided fuel for a decline, with Nokia (NOK) announcing a fresh round of layoffs.
After reading those headlines, the obvious expectation would be for a steep decline in risky assets -- yet Thursday saw anything but. Stocks surged on the hopes that the latest round of dismal data would effectively force the Fed's hand and prompt a fresh injection of capital into struggling financial markets. Blue chip stocks surged more than 1%. Greek stocks, which have been battered and bruised so far in 2012, leapt a mind-boggling 10% -- and Global X FTSE Greece 20 ETF (GREK), the only pure play Greek ETF, added 12.5% on the day. It was the most unexpected rally in recent memories, and it was a major move higher for just about every risky asset class.
Whenever I see a big disconnect between data and stock market performance, I look carefully for opportunities -- and Thursday was perhaps the most significant contradiction we've had this year. Surrounded by disappointing data, stocks posted one of their most impressive days of the year. There are a lot of words that can be used to describe the buying spree on Thursday, and "foolish" is among them. The past few years have shown us that rallies fueled by expectations of a crutch tend to lack staying power. Ultimately, it's the underlying economic fundamentals that rule the day.
After a stellar first four days of the week (against a backdrop, of course, that paints a deteriorating economic picture) it seems as if a short term pullback is ahead. Once investors have a chance to temper their expectations about government support of the markets and fully digest the recent spate of bad news -- primarily the rapidly deteriorating situation in Spain -- we're going to see a few days of big losses in stock markets. A few ETFs to provide protection in the next week include the following.
ProShares Short S&P 500 (SH): Sometimes the simplest solution is the best. SH delivers inverse exposure to the S&P 500, meaning it will be extremely effective as a hedge in most portfolios.
Extended Duration Treasury ETF (EDV): As investors bought up risky assets Thursday, they sold off long-term bonds. Though EDV only shed about 0.2% yesterday, this ETF has definite appeal during tumultuous stretches for equity markets. If we see a swift downward correction in the coming days, as I'm expecting, EDV should perform well.