Equity ETFs Seem To Be Ignoring Europe – Domestic Buy Signal Generated

[Chart courtesy of MarketWatch.com]

Political deadlock in the wake of yesterday’s Eurozone meetings that failed to produce a definitive plan on how to deal with the continent’s mounting debt didn’t seem to faze markets in today’s trading session as the S&P 500 rose 1.29%. On the international front, the Nikkei, Shanghai Composite, FTSE, and DAX also posted gains.

In relation to earnings, Caterpillar’s above consensus performance provided some hope for the U.S. economy with regards to manufacturing, helping markets see some green. Also, there was a boost in M&A activity that was promising. Yet, the big story is still Europe.

While it appears that markets aren’t heavily taking European uncertainty into account right now, there’s no denying that Europe’s house is not in order. Member nations and Greek debt holders still can’t decide on the size of the haircut although 60% has been suggested as a minimum to help Greece stave off default given that it will need $350 billion in aid through the end of the decade. But it gets worse than that.

The scarier part in the wake of this past Sunday’s meeting is that in relation to EFSF funding, Eurozone leaders are advocating a leveraged model. They want to employ some of the financial engineering tools (i.e. CDO-squared instruments) that partially got us into this mess in the first place, possibly increasing the severity of contagion in a downside scenario. It looks like the global financial system still hasn’t learned its lessons from the recent downfall.

Overall, it’s puzzling how some temporarily uplifting economic signs could outweigh Eurozone debt crisis issues. But when I come to think of it, market movements in the last couple weeks haven’t made much sense.

Nevertheless, we’ve seen somewhat of a positive short-term trend turning into a major trend, which consequently may justify more equity exposure other than sector ETFs.

Our Domestic Trend Tracking Index (TTI) has now pierced its long-term trend line by a sufficient amount (+2.53%) to officially declare a new ‘Buy’ signal, effective tomorrow, Tuesday, October 25, 2011. This applies only to “widely diversified domestic equity mutual funds/ETFs.”

Yes, I know, I am just as concerned as you are about the outcome of the Eurozone summit, which is now scheduled to end with a major announcement on Wednesday. Any disappointment is sure to cause a market selloff following the old adage “buy the rumor, sell the fact.”

Just because the domestic TTI has signaled a ‘Buy’ after weeks of vacillating above and below its long-term trend line does not mean that all is well in bullish territory and that you should jump in and seek market exposure with all of your assets.

Personally, my plan is to ease into the market after the final summit announcement has been made this Wednesday or Thursday, just in case the markets sell off, should the details of the master plan to solve the European crisis be less than expected.

Uncertainty is at an all-time high, and the use of my recommended trailing sell stop discipline is absolutely imperative to avoid participating in a downside disaster. Again, do not invest, unless you make provisions to apply my exit strategy.

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