Although not a huge day, markets remained in the green, with the S&P 500 rising 0.98% and the dollar continuing its downward slide against the Euro to $1.38/Euro. Again, volatility decreased significantly, with the VIX falling 4.87%. This recent market run-up beckons the question of whether one should dive in and seek to capitalize on this short-term rally.
With Slovakia coming closer to a compromise concerning the EFSF expansion, there is temporary optimism that there will be an adequate financial backstop to help solve Europe’s debt issues.
However, I am looking long-term to see whether a sustainable model can be implemented that won’t rely on continual borrowing with mounting financial obligations. One strategist pointed out correctly that “if the Europeans deliver what they normally deliver, which is well below expectations, then risk assets will sell off and the euro will come under pressure once again.”
While equity ETFs currently appear attractive, we are still in a downtrend environment that supports our strategy of primarily remaining in cash/bond ETFs, although they have remained flat or slightly negative recently.
Meanwhile, the released FOMC minutes from the Fed suggest that the possibility of QE3 is certainly on the table. This could potentially lead to a positive market reaction assuming the perception of QE3 falls in line of market sentiment following QE1 and QE2 – but there is a caveat.
There is an indication that the Fed believes U.S. growth will continue to be anemic, which likely wouldn’t bode well for markets in the long-run. Instituting QE3 is a sign that the economy cannot keep itself afloat without significant intervention. Thus, I will be keeping a close eye on these developments to see if QE3 may serve to buoy markets in the short-run.
On the commodities front, industrial commodities had a big day. The Copper Total Return Sub-Index (JJC) was up 2.14%. In respect to copper, China’s demand has picked up again, although it’s still difficult to pinpoint whether China will continue growing or if their economy is starting to cool down given the recent decline in copper prices.
Nevertheless, my primary focus remains on Europe to see if it can weather this political maelstrom and provide a detailed strategy as to how it plans to tackle the debt crisis.
Despite some considerable market gains, I believe it’s still early to head back into equities in general until a long-term positive trend develops, although I will be looking closely at some specific sector ETFs, which have just crossed their respective long-term trend lines to the upside.
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