The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- I didn't pursue a Master of Business Administration when I was younger; rather, I felt there would be more value in a Master of Science in Industrial/Organizational Psychology (a.k.a. "the psychology of business").
Why did I/O beckon more than the typical MBA track for financial professionals? In essence, the crash in October of 1987 had a profound affect on my sensibilities; I became keenly aware that the financial markets were more about fear and greed, less about projected earnings and widget sales.
The psychology is somewhat bleak at the present. Certainly, fear is elevated. Even Bob Doll of
seems decidedly less bullish than he did at the start of 2011.
Granted, it is not difficult to say that fear is elevated; anecdotally, it may seem obvious. Nevertheless, ETF investors need actual measures to address where we might be on the fear-greed continuum. Throw-in-the-towel petrified may be a potent "buy signal," whereas hold-'n'-hope pessimistic may not be.
For example, one of the most popular measures of fear, the
CBOE Volatility Index
, has remained north of 30 for four months. (There have been a few days where the VIX closed below 30, but not many.) Investors would be wise to track the
iPath S&P 500 VIX Short Term Futures ETN
. This exchange-traded note reflects the implied volatility of the
index. When the current price of VXX is above a critical 50-day moving average, U.S. stock assets are inherently more risky.
and become a fan on
With the exception of a seemingly critical break lower in October, VXX has been "hugging" its 50-day trendline. In other words, we're not getting the kind of spike higher to attract "buy low" value hunters. Additionally, without a substantive move lower by VXX, confidence will continue to be in short supply and equities will struggle to gain significant ground.
Another way to evaluate our location on the fear-greed continuum is to check in on Treasury bonds. While we know that interest rates are low due to the European quagmire, quantitative easing, "Operation Twist" and a probable austerity-driven recession abroad, investor willingness to take on more risk than 2%-yielding 10-year Treasuries can be tracked.
iShares 7-10 Year U.S. Treasury Bond Fund
can help you assess risk appetite. In fact, IEF has been travelling a very similar path as VXX has. With IEF above a 50-day trendline -- or an ongoing "hugging" of that trendline -- there's little reason to expect riskier stock ETFs to perform admirably just yet.
My third recommendation for tracking fear is the
PowerShares DB G-10 Currency Harvest Fund
. It is sometimes affectionately referred to as the "Carry Trade" ETF. In essence, DBV is a means for average investors to go long the three G-10 currencies with the highest interest rates while simultaneously going short the three that have the lowest interest rates. The intention is to mimic the effects of borrowing from low-yielding currencies to invest in high-yielding currencies.
Right now, though, fear is palpable. Investors have been flocking to the perceived safety of the yen and the U.S. dollar; that is bad for the short position. Similarly, a long position in the Australian dollar and New Zealand dollar is less desirable in a world that doesn't quite trust the global financial system. It follows that the current price of DBV is below a 50-day and a 200-day moving average.
With each of these three "fear indicators" suggesting pessimism, one needs to remain conservative. I continue to favor assets that should perform well, regardless of the questionable macro-economic environment. Look to yield producers such as
Powershares Low Volatility (SPLV),
JP Morgan Alerian MLP ETN
iShares High Dividend Equity
Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.