Equity ETFs Move to Upper End of Trading Range—Another Head fake?

Last Monday, I commented that the S&P 500 has been range trading over the past month from a low of 1,120 to a high of some 1,220.

We are now approaching the high end of the range again, and the questions remains as to whether resistance will kick in again at that level or at 1,217, which represents the index’s 50-day exponential moving average.

Powering today’s rally were news reports that five major central banks, including the Fed, had agreed to provide dollar liquidity for the European banking system in order to stave off a potential credit crunch.

While that did not solve any of the problems that ail Europe, it was enough to propel the major market ETFs higher, although it happened on very thin volume.

That was the main focus. Some reality in form of a string of weak U.S economic reports like a rise in jobless claims, a higher than expected CPI along with weak manufacturing did not matter to the markets at all; sooner or later they will.

Taking a beating in all of this euphoria was gold, which has been pulling back during this rally but remains ahead YTD by some 25%. Since gold is a large component of our core holding PRPFX, we have not seen any participation in this recent 4-day rally.

While the S&P 500 has made up most of the losses sustained in the first part of September, more work needs to be done to move the index back into plus territory for the year.

It is interesting to note that this week’s advance was powered by nothing more than hope that the European crisis may not turn out as bad as it looked during the weeks prior. Since no real issues have been resolved, I am very skeptical as to the duration of this rebound.

Any disappointment, or lack of progress to these perceived solutions, and the market will be heading back in the other direction. My view still is that the downside risk is far greater than the upside potential. On other hand, if I am proven wrong, I will reverse direction and seek more bullish exposure.