To Be or Not To Be Back In Equity ETFs

Last week’s market run-up has probably got you thinking whether you should head back into equities. While the short-term positive trend in equities looks promising, the long-term trend is still well into bear territory, especially given the uncertain long-term future of the Eurozone and other negative global economic developments. On this basis, I suggest remaining out of equities.

Nevertheless, it is worth taking a look to see how some ETFs have fared lately to give further credence to my views. First off, domestic equity ETFs experienced outflows of $5.3 billion, a likely indication of market fear given pessimistic U.S. economic data and Eurozone issues.

However, international equity ETFs had inflows of $2.7 billion. This figure is somewhat puzzling given overheating in emerging markets and European exposure that could lead to a flight from international markets to relatively safer U.S. government securities. For instance, the iShares Barclays 20-year Treasury Bond ETF (TLT) is up 24% in the last 3 months whereas the SPDR International Treasury Bond ETF has fallen 2% over the same period.

With respect to equity ETF performance, this past week might’ve shed some light at the end of the tunnel, but the overall situation is still pretty dark. Despite some lower volatility toward the end of the week, the SPDR S&P 500 ETF (SPY) and the SPDR Dow Jones ETF (DIA) are still in bearish territory, down 13.9% and 12.2% for the past 3 months, respectively, well below their long-term trend lines.

Meanwhile, global equities paint an even bleaker picture. One example is the SPDR S&P BRIC 40 ETF (BIK), which has retreated 25.2% in the last 3 months. And the general emerging markets picture isn’t looking much better. Lower economic growth forecasts and reduced commodity demand in China as well as inflation fears in China, India, and Brazil worsen the overall outlook for international equity ETFs.

As if potential Eurozone debt crisis contagion effects weren’t enough to cause a slide in equity values, especially after Fitch’s Italy and Spain downgrades, the consequences of hot money flowing into EM countries can put an additional damper on equities. I wouldn’t be surprised if these issues could extend well into U.S. equities. This is why I continue to believe that cash and/or some bond ETFs are the most attractive option at the moment, many of which are posting mid-single digit positive returns year to date.

In an environment with a confluence of uncertain variables pointing to the downside with a high probability, I try to avoid both domestic and international equity ETFs no matter how appealing brief momentum upswings are. As always, I will let my Trend Tracking Indexes be the guide to alert me to a change in market direction.