The Calm Before the Storm—Stay In Cash Or Retreat to Safer Non-Equity ETFs

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[Chart courtesy of MarketWatch.com]

Markets continued to ride yesterday’s reversal, as major index ETFs and commodities such as gold and oil posted sizeable gains (S&P 500 up 1.79%, oil up 5.35%) while volatility subsided (VIX down over 7.5%).

However, this short-term market upswing appears to have little credence in the midst of a serious European debt crisis where there is a probable near term negative shock to the stock market as a Greek default becomes more likely.

Meanwhile, it has been suggested that a $2 trillion funding line through the EFSF is deemed necessary to address overall European debt. Also, the possibility of Franco-Belgian bank Dexia failing, despite having passed stress tests a few months back, can create a Lehman-esque scenario in Europe.

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7 ETF Model Portfolios You Can Use – Updated through 10/4/2011

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Another 2% market drop, since last Wednesday’s report, moved our ETF Model Portfolios only slightly. The reason is, of course, that we have been stopped out of all volatile positions over the past few weeks and are now only invested in a few bond ETFs.

We sold the world bond BWX in portfolio #4 yesterday, as it had dropped off its high by some -6.5%. Remember, for bond ETFs, my preferred sell stop point is 5%, as opposed to 7% for equities.

With all portfolios, we are now in a holding pattern waiting for new opportunities to develop. I see those mainly in certain bond ETFs and possibly the U.S. dollar.

Take a look at the latest numbers:

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Equity ETFs Tank—Then Rebound Sharply In Last Hour

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[Chart courtesy of MarketWatch.com]

Note: Gold and oil prices in above chart reflect the evening session

One of the most frequently asked questions I have received since the beginning of our Domestic Sell Signal, which was effective 8/9/11, is why I don’t recommend using inverse ETFs, such as SH for the S&P 500, to take advantage of bear market conditions.

My answer is always the same. It looks like a good idea on the surface when reviewing charts of past bear markets. However, what you don’t see is the tremendous volatility that comes with bear markets via sudden reversal days and sharp up moves, which make this a proposition for only those with an aggressive risk profile.

Today was typical for that type of bear market behavior as the Dow swung within a 400 point range, while the S&P 500 vacillated within 49 points.

If you were short the market, you would have been pleasantly surprised to see the opening 2% drop for the major market ETFs, only to be dumbfounded by an astonishing reversal during the last hour, which would have you question the wisdom of your choice to be short the market.

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Stumbling Into October—Major Market ETFs Retreat Sharply

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[Chart courtesy of MarketWatch.com]

The major market ETFs took it on the chin today in what appears to be a continuation of last week’s selloff. The S&P 500 ended up closing below its trading band that I discussed last Tuesday. I featured the S&P 500 chart below, which now clearly shows the downside breakout:

Today’s weakness pushed stocks to their lowest closing levels in a year with the culprits being the usual suspects. The situation in Greece is getting more worrisome by the day, while recession fears in the U.S. continue to linger, although I happen to believe that we’re already in it.

At the same time, worries persist as to the fallout when not if Greece defaults. How many banks are overleveraged with foreign debt so that the slightest haircut will send them into receivership?

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Last Week In Review: ETF News And Blog Posts To 10/2/2011

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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 10/2/2011.

More downside momentum finally pushed our Domestic Trend Tracking Index (TTI) further into bear market territory.

Europe and its multitude of debt solutions, most of them band aid approaches, will remain on the agenda next week, which simply means that we will have to live with more market turmoil. If that happens, I will not be too concerned, since we are out of equity ETFs/Mutual funds altogether.

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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The Big Picture: A Video Interview With Gary Shilling

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Hat tip goes to Mish at Global Economics for the link to an interesting video interview with economist Gary Shilling. Gary discusses deleveraging and the dangers of ongoing deflation, along with what he expect to happen in the markets.

I agree with his findings and views, especially my recurring theme of downside risk being far greater than upside potential.

Take a look: