Here’s the latest update, which includes the cutline pricing information after yesterday’s sell off. What’s interesting is that 2 bear market funds have broken above the cutline and moved into the +12 and +13 placement positions.
The momentum figures clearly show that it’s too early to make a commitment to the short side. But when is the right time?
First, let’s take a look at the latest cut line table for mutual funds:
There’s no question which news event ruled the day. From the get go, it was S&P’s announcement that it is cutting its outlook on U.S. government debt to negative, which could threaten its pristine AAA rating.
The major market ETFs dropped like a rock, but afternoon bargain hunting limited losses somewhat. Good thing there wasn’t another negative news report, or this could have been a truly ugly day.
Gold was the beneficiary and hit a new closing high of $1,492.90, while sneaking up on the $1,500 level. Surprisingly, bonds rallied as interest rates sank while the dollar rose. The combination of higher gold and bond prices served us well, as our core holding PRPFX slipped only by -0.23% vs. the S&P 500’s -1.10%.
In this latest edition, you’ll notice again that ETFs do not remain in the same position in relation to the cutline for very long when market weakness sets in. For example, DFJ, which had a +1 placement last week, sold off sharply and ended up in the -12 position.
The lesson is that you need to have ETFs move above the cutline by a decent margin before considering them as a buy. Additionally, you want to make sure that all momentum numbers across are positive.
Take a look at this week’s table:
The WSJ (subscription required) had some interesting thoughts in “Exchange Traded Funds Gone Wild:”
Exchange-traded funds had such a humble start, it’s hard to believe what a crazy mélange they’ve become.
Back in 1993, the Standard & Poor’s Deposit Receipt (SPDR, pronounced Spider) launched, giving investors a fresh way to invest in the Standard & Poor’s 500-stock index. And, for a long time, ETFs matched this kind of simple, index-tracking investing.
But in the past few years, ETF providers (with the permission of the Securities and Exchange Commission) have sliced and diced investment ideas to such an extent that an investor can find an ETF for just about anything. According to the Investment Company Institute, a trade group, there were 956 ETFs at the end of February, with more than $1 trillion in assets in all.
While choice is generally a good thing, a good chunk of the nearly 1,000 ETFs should be avoided by most investors. They are too narrow, too risky and oftentimes simply faddish. Expect more of these mind-bending ETFs in the future.
The industry is gearing up to launch ETFs that focus on the automotive industry, bank loans and single-country sovereign bonds.
FSB stands for “Financial Stability Board.” It represents the world’s main regulators and central banks.
Let’s listen in to “Financial Stability Board Warns on Exchange Traded Funds:”
Exchange traded funds pose a serious risk of causing a new financial crisis and should be put under the spotlight so that the signs of a market crash are spotted early, according to the Financial Stability Board.
…
In particular, the FSB said it was worried that ETFs could exacerbate the impact of a future crisis as many funds are not fully-backed by the asset they are invested in.
“The expectation of on-demand liquidity may create the conditions for acute redemptions pressures on certain types of ETFs in situations of market stress, which could in turn affect the liquidity of the large asset managers and banks active in this market,” said the FSB.
Lord Turner, chairman of the Financial Services Authority, is among the senior regulators to have warned of the risks presented to the financial system by ETFs, in particular those that offer leverage.
ETFs have become popular among retail investors in recent years as they offer a cheaper way for the public to get exposure to assets they would normally find it difficult to invest in such as physical commodities such as gold and oil.
Jonathan Compton, founder of Bedlam Asset Management, has warned repeatedly of the dangers of ETFs and said a crisis in the market was a question of “when not if”.
ETF/No Load Fund Tracker StatSheet
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THE LINK TO OUR CURRENT ETF/MUTUAL FUND STATSHEET IS:
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Market Commentary
Friday, April 15, 2011
MAJOR MARKET ETFs: SLOPPY AND CHOPPY
The past five trading days turned into a repeat of the prior week, as the major market ETFs continued to meander aimlessly but moved higher today in the face of several headwinds.
Some of them came in form of higher inflation readings here in the U.S. joined by China and Europe. Other disappointments were B of A’s earnings, higher oil prices, a downgrade of Ireland’s debt, worries that Greece will default and surging gold prices.