After three days of large swings, markets tempered a bit to say the least. Volatility heavily subsided as the VIX rose 1.28%. As far as market performance, the S&P 500 posted a modest gain of 0.46% while trading with a relatively narrow 20 point band. In an otherwise relatively quiet day, gold took a bit of a dip, dropping 2.25%. Europe is still our primary focus in trying to determine market direction.
Although Greece has taken some arguably positive short-term steps to prevent default by passing austerity measures, Europe’s fate hasn’t gotten any more certain. The French and Germans remain divided over how to go forward with the EFSF expansion in terms of how much each country should contribute. More fundamentally, there is no consensus as to how the funds should be raised, leaving the plan in limbo. But there is some hope that Europe is taking some steps in the right direction.
Europe announced a plan to implement a permanent bailout fund sometime in 2012. One worrying aspect of the overall bailout scheme is a proposition to prevent countries that join the bailout from receiving credit downgrades. This would be dangerous for investors trying to assess the solvency of European countries especially during such a critical moment. In essence, there are major hurdles Europe will have to pass in providing a rational and sustainable debt solution that markets can put their faith in.
In the U.S., today’s housing sales numbers provided an abysmal picture as home sales fell over 3% in September while the commercial real estate market remains weak. The U.S. continues to face a challenging economic environment that gives us little reason to believe that equities on the whole will make a major turnaround any time soon.
You can easily confirm the lack of upward momentum in my latest High Volume ETF Cutline report. It clearly shows that the majority of equity ETFs remain stuck in bear market territory and more work to the upside is needed. However, a breakout from the trading range of the past 2 months will accomplish that and give us the opportunity to ease back into equities.
Right now, with lack of clarity as to how Europe will proceed with its bailout plans, we still adhere to our current strategy of bond ETFs and cash.
Not only will I be travelling back from Germany this upcoming weekend, we will also witness another round of European talks introducing the alleged master plan designed to solve all debt issues. Having watched this debacle daily live from Hamburg, I can with some certainty say that a grand solution will not be in the cards and, very likely, the can kicking experts will not offer much at all but will agree to more meetings in the future.
If that’s how it turns out, I am not sure about market reaction. Much of the rally over the past 2 weeks was based on the Europeans coming up with a plan, which now looks to be more wishful thinking than reality.
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