ETF/No Load Fund Tracker StatSheet
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Market Commentary
Friday, October 7, 2011
BULLS BATTLE GLOOMY MARKETS
While this past week might’ve shined some light on investors, overall market dynamics continue to be dour as the European debt crisis deepens, GDP forecasts take a turn for the worse, and the U.S. remains at a political standstill on how to spur economic growth. With the S&P 500 down over 8% this year with a significant amount of volatility in the last two months, I continue to believe that staying out of equity ETFs is the most prudent course of action.
First off, the European situation isn’t getting any better. Greece’s unsustainable debt load, and the financial strain that additional debt restructuring would incur on the Eurozone, make Greek default an increasingly probable scenario.
Given the large percentage of Greek debt held by Eurozone members, there’s a greater likelihood of a negative ripple effect severely impacting stocks from Europe to the U.S. and emerging markets. An en masse move toward relatively safer investments such as U.S. Treasuries and the U.S. dollar in the wake of a Euro crisis is quite realistic despite the 10-year yielding less than 1.8%.
Reduced global growth forecasts are another impetus for staying on the sidelines out of equities. In China, the precipitous drop in copper of over 20% in the last few weeks appears to be signaling reduced GDP growth in China. Meanwhile, the U.S. and Europe are projected to have GDP growth under 2%, giving me further cause to concentrate holdings in cash and bonds.
Nevertheless, in the unlikely event of a market uptick, I remain on the lookout for sector ETFs such as the Consumer Staples Select Sector SPDR (XLY). Composed of high dividend yield stocks, it has outperformed the S&P since late 2008, and while trending below its 200-day MA, it can reap some rewards once it closes above that level.
As far as the U.S. is concerned, the government is running out of policy moves to restore growth and boost equity markets. Austerity measures are necessary in the long-term to solve the massive debt burden. But with a very fragile economy, as evidenced by anemic second quarter GDP growth of 1.3%, I would bank on the fact that further economic contraction and corresponding decreases in equity prices will follow suit if politicians impose fiscal consolidation.
Several positive data points contributed to this week’s rebound, as the bears may have gotten ahead of themselves by pushing the major market indicators too deep into the basement last Monday. Any extreme move is subject to a reversal, and this week was no exception, as the indexes rallied back with the S&P 500 gaining +2.12%.
Our Trend Tracking Indexes (TTIs) recovered as well and have reached the following positions relative to their respective trend lines:
Domestic TTI: -0.62% (last week -1.13%)
International TTI: -11.07% (last week -13.26%)
The market environment remains highly volatile and further downside moves are just as possible as a continuation of this rebound. Until there is a breakout to the upside (above 1,230 on the S&P 500), I consider this activity nothing but range trading, which is a great environment for traders but not suitable for investors.
On a personal note, I will be crossing the big water hazard this weekend on my annual trip to Hamburg, Germany. In case you’re wondering, I will not be going to the Oktoberfest, and I will not get involved in trying to attempt to solve the European debt crisis.
My visit is strictly personal, as I want to spend some time with the few remaining members of my German family. As always, my laptop will be my trusted companion. I will produce the usual blog posts and will respond to your emails as well, however, due to the time difference, I’ll be working and posting on a delayed schedule.
I will return in two weeks and will be back in my office on 10/24.
Have a great week.
Ulli…
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READER Q & A FOR THE WEEK
All Reader Q & A’s are listed at our web site!
Check it out at:
http://www.successful-investment.com/q&a.php
A note from reader Lew:
Q: Ulli: Considering the slide momentum why aren’t you considering taking positions in inverse funds such as SH, DOG, EFZ or EUM?
A: Lew: As I said Lew, they are too volatile for my taste. If you have an aggressive risk profile, go ahead. But be aware that, during bear markets, you can have huge rebounds, which will test your resolve of being short.
This past week demonstrates my point and will have many investors, who shorted the market, scratching their heads wondering about the wisdom of their decision.
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