Equity ETFs Surge, But Don’t Get Too Excited

[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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