Equity ETFs Surge, But Don’t Get Too Excited

Ulli Market Review 3 Comments

[Chart courtesy of MarketWatch.com]

With the perception that Europe has perhaps now avoided disaster, markets responded with jubilation. The S&P 500 rose 3.43% while other indices such as the FTSE, Nikkei, and Shanghai Composite also rose.

Meanwhile, oil got a 4.00% pop while the 10-year Treasury climbed up to 2.40%, its highest yield since early August. Also, the dollar depreciated almost 3 cents against the Euro, falling to $1.42/Euro. And most noteworthy, the VIX dropped a staggering 14.57% to 25.51.

So, you might ask, are we back into risk off mode where we can regain our equities appetite? I wouldn’t fully say yes, but an entry point for some equity exposure is certainly becoming clearer, as confirmed by our recent domestic Buy signal. Additionally, the S&P 500 is now well above its 50-day MA and has now crossed above its 200-day MA as of today.

Whether Europe has averted a major crisis down the line remains to be seen, but at least there’s a little less uncertainty now. EU leaders and Greek debt bondholders finally agreed to a 50% haircut, which still may not be sufficient, but is far better than the original 21%, cutting Greek debt by $100 billion. With an additional $30 billion in aid as incentive for banks to accept the write down, this should help reduce its debt-to-GDP ratio to 120% by 2020, as if that’s something to celebrate.

Details concerning how the EFSF will be leveraged have yet to be cemented. However, it appears that Sarkozy scored a minor victory by getting the Chinese premier to consider the possibility of China offering aid given how a potential contagion could have an adverse impact on China. In this framework, the EFSF would be set up as a special investment vehicle with various sovereign entities providing funding.

As far as bank recapitalization is concerned, the European Banking Authority has pinned a figure of $106 billion in aid. Whether this is enough to ensure capital adequacy will be interesting to witness over the next 6-12 months considering the recent stress test flub.

Relatively good news in the U.S. also helped to buoy markets. Third quarter U.S. GDP was reported to be 2.5%, largely driven by consumption. Though this quarter’s growth is comparatively better than the first and second quarters, it’s not a clear indication that we’ve avoided a double dip recession. Until there’s a reduction in unemployment and an improvement in the housing sector, I am bearish on the U.S. economy.

In the short-term, I think it’s relatively safe to say that with some risk off the table, this is an opportunity to begin gradually reintroducing some equity exposure, which I did this morning.

I’m not fully convinced we are heading well into a bullish phase, but we want to participate in the upside with particular equity ETFs, while maintaining a strict stop loss discipline if markets suddenly tank.

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Comments 3

  1. International ETFs are currently outperforming domestic when 5 and 20 day returns ar viewed.

    I would play the domestic side and play safe with IWM

  2. 19/27/11
    I thought this detailed analysis of just what the EU agreement means was quite useful in bolstering my belief in staying in cash a while longer… I would be very greatful for any comment on it by you.

    Also, can you tell us what sectors you chose today when you dipped your toes in?

    And many of the country funds seem to be going along with the domestic rally. Strictly, we should keep away until the International Trend Line says “Buy”; is that your advice?

    Thanks again.
    David Galin MD

  3. David,

    Yes, I agree with much of what the article said. I just can’t get the warm fuzzies about the EU solution thinking that no structural issues have been resolved. Battling the cause, which was too much debt, by generating more debt is a prescription for long-term disaster. I think the can has been kicked down the road again, but eventually the price for fiscal irresponsibility will have to be paid.

    I dipped into VTI to participate in the general direction of the market and some PRPFX. Country ETFs are a buy whenever they cross their respective trend lines to the upside. The international TTI, now about 2% away from a new ‘Buy’ applies to “widely diversified international funds/ETFs” only.


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