ETF/No Load Fund Tracker Newsletter For Friday, January 27, 2012

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Market Commentary

Friday, January 27, 2012


In what’s been a bit of an up and down week, the S&P 500 dropped 0.16% today. However, it’s been the 4th straight positive week for the index. With the spate of European downgrade news, European indices saw plenty of red.

Despite continued negativity in the Eurozone, the Euro once more appreciated against the dollar, hitting $1.32/Euro. Nevertheless, investors sought safety in low risk assets as the 10-year Treasury yield fell to 1.90%.

While it’s difficult to point to one indicator to gauge risk, seeing as the VIX has remained low but demand for Treasuries has been high, the outlook for Europe and the U.S. is pessimistic at the moment. To put it succinctly, we are in risk on mode for the long-term.

Today’s lackluster GDP numbers are proof that the U.S. is still a far way off from recovery. GDP growth was 2.8% in the 4th quarter, lower than expected. It is this anemic growth that supports the Fed’s decision to keep rates near zero through 2014, as credit markets have yet to serve as an effective channel to spur growth over the last few years.

Following in line with Standard and Poor’s, Fitch Ratings docked Spain and Italy down two notches. Although borrowing costs for Spain and Italy didn’t rise following the S&P downgrades, we’ll have to see if the investor outlook darkens now that two major ratings agencies have downgraded them.

Already stricken with high yields, Spain is now a caught in a tighter pickle. It needs to reduce its budget deficit through austerity, but with unemployment now at 23%, Spain has to stimulate its economy somehow. Spanish Prime Minister Rajoy is now appealing for laxer Eurozone budget deficit targets. I’m afraid that despite efforts from Merkel and others to impose strict budget standards, the unique circumstances and needs of each Eurozone country will be too much to overcome.

With respect to our Trend Tracking Indexes (TTIs), our Domestic TTI remains above its trend line at +4.27% while the International TTI has inched closer to its trend line at -0.20%. I will be staying out of international ETFs and would only add exposure if there was a confirmed uptrend in progress. Nevertheless, I will post a special update in the blog should an International Buy signal materialize.

A bullish January has lifted markets for sure, but it’s necessary to proceed with caution as we might see a tumultuous February considering developments in Greece. I believe maintaining a solid bond ETF allocation mixed in with a few attractive domestic equity/sector ETF names is the best strategy going forward.

Have a great week.




All Reader Q & A’s are listed at our web site!
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A note from reader GEH:

Q: Ulli: In these turbulent markets your ETF News continues to be a great source of information and guidance.

You clarify your Cutline reports with this comment:

“The second report includes only High Volume ETFs. To clarify, High Volume (HV) ETFs are defined as those with an average daily volume of $10 million or higher.

These ETFs are generated from my selected list of some 93 that I use in my advisor practice. It cuts out the “noise,” which simply means it eliminates those ETFs that I would never buy because of their volume limitations. 33 ETFs (last week 21) have managed to hang on in bullish territory after the recent volatility.”

By this, do you mean that you only buy ETFs that are on the High Volume Cutline Report? And if so why?

Do you use a similar guideline for Mutual Funds?

A: GEH: If you personally invest only smaller amounts of money, you can pretty much choose any ETF that appeals to you. As an investment advisor, I move larger amounts of client’s assets into and out of ETFs, so volume becomes a critical factor to me. It allows me to exit, when our sell stops get triggered, without too much slippage in price.

That’s not an issue with most mutual funds, but I still won’t use any with assets of under $50 million.



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