ETF/No Load Fund Tracker Newsletter For Friday, July 27, 2012
ETF/No Load Fund Tracker StatSheet
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Market Commentary
Friday, July 27, 2012
EQUITY ETFS SURGE FOR SECOND STRAIGHT DAY ON EUROPE HOPE; EWP VAULTS, VIXY IN THE TANK
US stocks rallied for the second consecutive day on Friday, finishing the week higher on hopes the European politicians will take measures to prevent the sovereign crisis from spiraling out of control.
Especially ECB president Draghi’s chest pounding announcement that “believe me, it will be enough,” as he discussed bond buying options, along with rumors of a banking license for the yet to be approved/funded ESM, put the fear into the bearish crowd. The end result was a 2-day rally which just about had everyone covering their shorts, which brings up the interesting question as to what will happen once reality sets in after the jawboning effect wears off?
I don’t have that answer yet, but once the usual disappointment about lack of progress sets in, and the markets retreat, who will be setting a floor via new buying if all shorts have covered already? Just food for thought.
Nevertheless, a rally is a rally, and the Dow Jones Industrial Average (DJIA) soared 188 points, finishing above the psychologically significant 13K level for the first time since the first week of May. Within the Dow, all the 30 components closed in green as the blue-chip index added 1.97 percent for the week.
The S&P 500 Index (SPX) rose 26 points to 1385.97, finishing the week 1.71 percent higher. The technology and healthcare sectors gained the most as all the 10 major industry groups advanced for the day.
The Treasury benchmark 10-year yield gained the most in over four months as speculations on European leaders taking effective measures to contain the sovereign debt crisis improved risk sentiments, softening demand for safe have assets.
The 10-year Treasury yield leapt 12 basis points to 1.55 percent as US Q2 GDP data came in at 1.5 percent, beating analysts’ estimate of 1.4 percent. Yield on 30-year bonds soared 15 basis points to 2.64 percent in late afternoon trading, after French newspaper La Monde reported the European Central Bank is allegedly preparing to buy sovereign bonds from the secondary markets in an effort to bring down borrowing costs.
ETFs in the news:
Extending gains for the second straight day, Spain and Italy-linked ETFs progressed the most Friday as investors remained bullish that the ECB will either directly buy bonds from the secondary markets or initiate another round of LTRO to improve the finances of the most battered countries.
The iShares MSCI Spain Index Fund (EWP) surged 6.11 percent after the country’s 10-year borrowing costs sank as low as 6.70 percent during the day’s trade over speculations that ECB president Mario Draghi could meet the head of Germany’s Bundesbank next week to discuss a more aggressive stimulus package.
The iShares MSCI Italy Index Fund (EWI) also pushed ahead, posting a solid 4.85 percent gain. Italy’s 10-year bond yields fell below the 6 percent mark on Friday for the first time since July 20. Improved risk appetite also pushed up advanced-Asia linked stocks.
The iShares MSCI South Korea Index Fund (EWY) gapped higher at opening as sentiment over Europe, the country’s second most important market, continued to improve as the day wore on and finished 3.98 percent on the day.
As risk sentiment improved, volatility evaporated from the markets, dragging the CBOE Volatility Index down 4.73 percent. The ProShares VIX Short-Term Futures ETF (VIXY) tanked, shedding 2.81 percent on the day. Other fear-tracking funds such as the Barclays iPath S&P 500 VIX Short-Term Futures ETN (VXX) also declined, losing 2.70 percent on the day.
Our Trend Tracking Indexes (TTIs) dropped during the early sell-off part of the week and then picked up steam as the major indexes rallied higher:
Domestic TTI: +2.86% (last week +2.73%)
International TTI: -0.41% (last week -2.44%)
Have a great week.
Ulli…
Disclosure: No holdings
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READER Q & A FOR THE WEEK
All Reader Q & A’s are listed at our web site!
Check it out at:
http://www.successful-investment.com/q&a.php
A note from reader Jack:
Q: Ulli: With the market activity of the past 2 days, your International TTI must have come within striking distance of a new “Buy” signal. While I don’t think much of this current rally, I am curious as to when exactly you will re-enter the market for this arena.
A: Jack: You are correct. As of today, the international TTI has reached a point that is -0.41% below its respective long-term trend line, which means we are within striking distance of a potential new “Buy.”
To avoid any potential whipsaw signal, I want to see a convincing piercing of the trend line to the upside along with several days of staying power above it. Generally speaking, that translates into somewhere 3-5 trading days above the line in the area of +1%.
While this does not guarantee that a whipsaw will be avoided, it enhances the odds of getting in as upward momentum accelerates.
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