Another Day in the Green – Is This Cause for Changing Your ETF Strategy?

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[Chart courtesy of MarketWatch.com]

Although not a huge day, markets remained in the green, with the S&P 500 rising 0.98% and the dollar continuing its downward slide against the Euro to $1.38/Euro. Again, volatility decreased significantly, with the VIX falling 4.87%. This recent market run-up beckons the question of whether one should dive in and seek to capitalize on this short-term rally.

With Slovakia coming closer to a compromise concerning the EFSF expansion, there is temporary optimism that there will be an adequate financial backstop to help solve Europe’s debt issues.

However, I am looking long-term to see whether a sustainable model can be implemented that won’t rely on continual borrowing with mounting financial obligations. One strategist pointed out correctly that “if the Europeans deliver what they normally deliver, which is well below expectations, then risk assets will sell off and the euro will come under pressure once again.”

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7 ETF Model Portfolios You Can Use – Updated through 10/11/2011

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The markets staged a recovery since last week’s report and surged from the low point of the trading range back to the upper part, but not close enough to demonstrate a break out to the upside. I displayed the S&P 500 graph in Tuesday’s market commentary.

With all portfolios, we continue to be in a holding pattern waiting for new opportunities to develop. The changes from last week have only been minor, since we no longer are invested in any equity ETFs.

Take a look at the latest numbers:

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Quieter Day for ETFs, But That May Change Very Soon; Trading Range Still Intact

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It was a somewhat uneventful day as markets ended relatively flat from the S&P to commodities and exchange rates. Is this a sign of a sea change following a week of up days? It just might be. Leaving Europe aside, the start of the earnings season kicked off rather disappointingly, which is likely to be reflected in tomorrow’s trading session. For example, Alcoa fell well below estimates while Goldman Sachs is forecast to have its worst quarter since later 2008.

After several days of subsiding volatility, today remained very stable as the S&P remained within an approximate 10 point range. Investors might be regaining their risk appetite as seen by an infusion of $1.23 billion into SPY yesterday a result of a pullback in the VIX and recently flat performance in bond ETFs. However, I firmly believe that there are too many negative signals warranting justification to get back into equity ETFs. There is simply very little evidence at the moment suggesting a move into bull territory.

In relation to Europe, the overall picture still isn’t looking so good. Greece is set to receive an $11 billion loan next month as part of its $110 billion rescue package which doesn’t bode well for investor confidence in Greece’s ability to escape default.

Adding another twist to the European debt crisis fiasco, just when the situation appeared to be under control after France and Germany’s joint statement to recapitalize banks, political turmoil has surfaced once more.

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Market Euphoria Shouldn’t Change Your ETF Strategy

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Last week’s market gains continued through today, as major indices posted large gains (S&P 500 up 3.41%) while oil and gold experienced sizeable pops (3.40% and 2.59%, respectively), and the dollar sharply depreciated against the Euro ($1.36/Euro).

Although a long-term debt overhaul plan in Europe isn’t fully in place, and I have to question whether it actually ever will, the market has responded quite positively to the announcement that France and Germany would work together to develop a bank recapitalization plan while trying to help Greece avoid default. However, this upbeat reaction is based on an expectation of a viable plan rather than clear evidence of an implemented strategy that is financially realistic. Thus, I would remain cautious of this perceived progress.

Also, France and Belgium decided to partially nationalize troubled Dexia with Belgium purchasing the bank’s retail banking division for $5.5 billion while guaranteeing a majority of the bank’s bad assets. Markets might interpret these short-term bailouts as signs of optimism, but if anything, it reveals a fractured European banking system susceptible to greater injury down the road, if a worse than expected situation unfolds. That’s why I am looking long-term rather than focusing on short-term market movements, especially since major equity ETFs are still in bear territory in relation to their trend lines.

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To Be or Not To Be Back In Equity ETFs

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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.

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Last Week In Review: ETF News And Blog Posts To 10/9/2011

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In case you missed it, here’s a summary of the ETF topics and market reviews I posted to my blog during the week ending on 10/9/2011.

A rebound from a deeply oversold condition, along with some not too bad economic data, pulled the major indexes out of the doldrums with the S&P 500 gaining 2.12%.

As the global economy reaches a potential tipping point, my advice is to stay out of equities until the Eurozone debt crisis subsides and there is some indication of higher GDP growth in the U.S. and abroad. In other words, real upward momentum needs to be restored first.

Government fixed income may not offer much upside at the moment, but for us, cash and some ETF bond exposure is a better alternative than getting burned by equities in this highly volatile downside environment.

If you followed my sell stops rules, you should no longer have any equity exposure at this time with the possible exception of a couple of sector/country/bond ETFs, or hedged positions.

This week, we covered the following:

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