Just when it seemed like markets came to reality and began taking Europe’s problems into account again, equities shot up, with the S&P 500 rising 2.04% while volatility subsided. The amount of sensitivity to news in the marketplace is borderline insane at the moment. I simply can’t deviate from our strategy yet, unless a viable long-term trend develops; at least for equity ETFs.
The big news of the day was an announcement from France and Germany that the EFSF would be roughly quadrupled to $2 trillion. Yet, the spread between the French 10-year bond and the German bund hit its highest since 1992 at 114 basis points. The expansion is a crucial step to address Eurozone debt, but does it mean we have a long-term solution?
The EFSF expansion might provide some brief jubilation, but there’s going to be a lot of hurt when countries have to start paying back these obligations. Spain is already pretty much in a state of insolvency, especially after Moody’s cut the country’s rating two levels and France is even more at risk of losing its AAA rating. Unfortunately, Europe is in a situation where it will have to make do with second-best alternatives, as it can’t get a globally funded bailout.
As far as sector ETFs performance is concerned, the Financial Select Sector SPDR ETF was the sector winner today as it rose 4.75%. However, I still remain pretty bearish on this sector especially given the sizeable European exposure some major banks have and worries on the consumer banking end.
Take a look at my recent sector ETF piece to see why it might be worth investing in sector ETFs, if there’s a persistent breakout to the upside. Actually, there are currently some opportunities, as a few sector ETFs have crawled back above their long-term trend lines. I took advantage of it by seeking exposure in XLP, which I will detail more in the weekly Model ETF Portfolio report due out later on.
Looking at the global picture, China’s less than expected third quarter GDP growth of 9.1% shook Asian markets up a bit as the Shanghai composite dropped 2.33%, casting doubts about whether China can continue to sustain high growth. The emerging markets growth story is also rather fuzzy at the moment, so I’ll be paying close attention to these developments.
Although markets had a solid day overall, albeit on low volume, I’d like to see a breakout above the current trading range before reconsidering equity ETFs.
In the case of the S&P 500, we have now bounced off the upper resistance level of the past 2 months, indentified around 1,230, and another push will drive us through this glass ceiling. This will give us the go ahead for new exposure in equity ETFs, which will also be confirmed by our Domestic Trend Tracking Index (TTI) having then clearly rallied above its long-term trend line.
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