ETF Watchlist for December 31, 2014

SPDR Energy (XLE)
United States Natural Gas (UNG)
First Trust ISE Revere Natural Gas (FCG)

The decline in oil prices slowed last week, but West Texas Intermediate Crude is again sliding to new lows in Wednesday trading.

Equity investors saw a buying opportunity in December and bid shares up off their lows, but will they keep buying if oil prices continue falling? Equity investors are forward looking, so a bounce in equity shares is likely to come before oil prices bottom out. We have a potential bottom here, but not a conclusive one.

Natural gas has been weaker than expected because December was warmer than expected. The drop in oil prices also rattled the natural gas market. Similar to XLE though, FCG has bounced even as natural gas moved lower. Natural gas’ one major strength is that it is priced locally. Natural gas can and will deviate from oil if demand rises in the United States, but it will take far lower temperatures this winter for that happen.


PowerShares U.S. Dollar Index Bullish Fund (UUP)
WisdomTree Dreyfus Emerging Currency (CEW)
Global X Greece (GREK)
CurrencyShares Euro Trust (FXE)
WisdomTree Dreyfus Chinese Yuan (CYB)

Greece’s ruling party failed to elect a president, so new elections are coming at the end of January. This throws the euro back into potential crisis since the party leading in the polls, Syriza, wants to scrap parts of the bailout agreements and end austerity. The euro is also slumping in part because traders believe a European QE policy is more likely with oil prices falling, since it will lead to deflation in the eurozone. The euro is at new lows for the year, but it is holding around its lows of the past 5 years. The next year will bring a big rally in the euro or a collapse to new lows, with the current political situation arguing for new lows. The Economist has a solid roundup here: The euro’s next crisis.

CEW bounced recently, helped by the big bounce in the Russian ruble, but over this period the Chinese yuan weakened. If the yuan continues to weaken, it will pull emerging market currencies lower with it, but for now, oil is still the bigger story.


iShares Nasdaq Biotechnology (IBB)
SPDR Biotech (XBI)

Biotechnology was hit by a slide in shares of Gilead (GILD) a week ago. A competitor had its hepatitis drug approved by the FDA and it also signed a deal with Express Scripts (ESRX) to sell the drug at a discount, potentially delivering a blow to Gilead. However, not all biotech ETFs were harmed by the news. IBB, which is a market cap weighted ETF, was hit hard by the news because GILD is a top ten holding. XBI, which is an equal weight index, has only 1 percent exposure to GILD and took a much smaller hit.


iShares Russell 2000 (IWM)
SPDR S&P Midcap 400 (MDY)

The small cap Russell 2000 finally climbed to a new all-time high last week. Small cap shares  previously peaked in March and then failed to follow the large cap indexes to new highs. Prior to the breakout in small caps, the mid cap indexes moved to new highs. Weakness in small and mid caps had raised a caution flag on the bull market, since it could be an early sign of a top in the market, but the push higher puts the market back on a firmly bullish footing as we head into 2015.


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