Last week’s market gains continued through today, as major indices posted large gains (S&P 500 up 3.41%) while oil and gold experienced sizeable pops (3.40% and 2.59%, respectively), and the dollar sharply depreciated against the Euro ($1.36/Euro).
Although a long-term debt overhaul plan in Europe isn’t fully in place, and I have to question whether it actually ever will, the market has responded quite positively to the announcement that France and Germany would work together to develop a bank recapitalization plan while trying to help Greece avoid default. However, this upbeat reaction is based on an expectation of a viable plan rather than clear evidence of an implemented strategy that is financially realistic. Thus, I would remain cautious of this perceived progress.
Also, France and Belgium decided to partially nationalize troubled Dexia with Belgium purchasing the bank’s retail banking division for $5.5 billion while guaranteeing a majority of the bank’s bad assets. Markets might interpret these short-term bailouts as signs of optimism, but if anything, it reveals a fractured European banking system susceptible to greater injury down the road, if a worse than expected situation unfolds. That’s why I am looking long-term rather than focusing on short-term market movements, especially since major equity ETFs are still in bear territory in relation to their trend lines.
On the volatility front, the VIX fell almost 9% to 33, a good sign that the market isn’t quite as topsy-turvy as it was a couple weeks ago. Yet still, these are elevated volatility levels that could spike back up again if there’s bad news in Europe and/or U.S. corporate earnings disappoint as Alcoa kicks off the earnings season tomorrow. In addition, the Fed will release its September FOMC meeting minutes, which should provided a clearer indication of interest rate policy and whether Bernanke and company are gearing policy for lower growth expectations.
Taking this into consideration, I still remain hesitant to get back into equities although the recent upswing might make it tempting to ride the positive momentum. I’m focused on long-run trends because the possibility of an upcoming inflection point leading to another large market drop is certainly possible in the near-term.
In terms of numbers, our international Trend Tracking Index (TTI) remains in bear market territory by -8.98%, while its domestic cousin has just climbed above the trend line by a scant +0.85%. We have seen this trend line dance before, ever since the domestic Sell signal was issued on 8/9/11. I want to see a clear piercing to the upside, along with some staying power, before getting my feet wet again on the long side of domestic equity ETFs.
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