Step Away From the Foreign Currency ETFs

NEW YORK (ETF Expert) -- Media outlets continue pressing the notion that new cash is entering the stock market from the sidelines. For the most part, this may be an accurate depiction.

Anecdotally, many of my risk-averse money management clients have asked me to move them up from "ultra-conservative" to "moderately conservative." Similarly, a number of traditional "moderates" are asking if now is the right time to become a bit more aggressive. In some cases, these clients are providing me with dollars from savings accounts that have not produced any growth or income.

With respect to actual price trends, stock market resilience has been remarkable. Buyers have been active on nearly every intra-day dip. Even in the face of info that normally frightens risk-takers (e.g., the election fiasco in Italy, China tightening up on property rules, the Federal Reserve becoming more leery of endless QE, U.S. government stalemate on the sequester, etc.), quick price recoveries pushed the mute button on one-day sell-offs.

While the activity may be a sign that stocks will not buckle when the Dow and/or the S&P 500 reclaim all-time highs, investors should still reassess the probability of a correction. Long-term Treasuries via iShares 20-Year Treasury (TLT) are back above a 50-day moving average. CBOE S&P 500 VIX Volatility (VIX) ) is also above a 50-day trendline. PowerShares S&P 500 Low Volatility (SPLV) continues to demonstrate greater relative strength when compared to the broader U.S. stock market.

Perhaps the most compelling sign that an increasingly defensive posture may soon change sentiment -- and by extension, market direction -- is the weakness in foreign currencies. For example, when investors back away from risk, they often run to the perceived safety of the the U.S. dollar. Indeed, over the last few weeks, PowerShares Dollar Bullish (UUP) has jumped dramatically. The exchange-traded fund tracker recently climbed above a long-term 200-day trendline.

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