Political Chaos in Europe Is No Good for Equity ETFs, Despite Today’s Sentiment

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[Chart courtesy of MarketWatch.com]

Despite the European turmoil at the political level, markets responded positively as the S&P 500 gained 0.63%.

The dollar remained relatively unchanged versus the Euro, staying at $1.38/Euro. Oddly enough, the Volatility Index was relatively flat, dropping 1.03%. While markets might be saying that Europe might be working to solve its solution, I still believe the worst is far from over. Equity ETFS are destined for a big shakeup sometime soon, unless a credible debt solution is planned and implemented.

Whereas much of the focus as of late has centered on how the Eurozone could create an economically viable bailout and bank recapitalization package, the spotlight now turns to politics.

Though it’s not official yet, Greek PM Papandreou is planning to step down, making the way for a new coalition government. While some might argue that a new coalition government might benefit Greece, the uncertainty surrounding how a new government plans on tackling the country’s debt issues is rather unsettling.

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Last Week In Review: ETF News And Blog Posts To 11/6/2011

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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 11/6/2011.

A sharp pullback during the first two trading days of the week kept the major indexes on the minus side as uncertainty in Europe flared up again. While Greece took center stage, Italy’s enormous debt gave markets reason for concern as bond yields rose to record highs.

It remains questionable if the EFSF can scrounge up enough money to bailout Italy as well, should that become a necessity. Markets will continue to react to the latest headline news about the European debt crisis, which will keep volatility high and market direction questionable at best.

Still, the trend is up, and we’ll carefully follow its direction.

This week, we covered the following:

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With Greece Already Infected, Will Italy Now Catch the Contagion?

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Right when it seemed like Europe was making some progress with EFSF expansion and a bank recapitalization plan, Greece’s woes have soured the mood once more.

With the referendum proposal and subsequent reversal this week, the political upheaval in Greece has reached a fever pitch as Papandreou might step down, creating further uncertainty.  EU leaders have already expressed their discontent, demanding that Greece break away from the Euro currency.

As the possibility of a disorderly Greek default comes into the foreground, our sights are also on Italy, the next in line so to speak. Although default and Italy haven’t been mentioned in the same sentence, the country’s escalating borrowing costs in tandem with its debt load, which is at 120 percent of GDP.

This week’s video gives a breakdown of how a negative event in Greece may spread to and impact Italy. To say the least, next week could be a rocky ride for equity ETFs if the downside becomes apparent.

http://www.bloomberg.com/video/79465584/

11-05-2011

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The ETF/No Load Fund Tracker—Monthly Review—October 31, 2011

From Bears To Bulls

October turned into another roller coaster month, as it it appeared that anything was possible. After a string of five losing months, the S&P 500 managed a sharp rebound but, looking at the big picture, this benchmark index remains still down for the year.

This gain did not come without pain as the bears had their way by continuing September’s downward momentum, at least for a few days, during which the S&P 500 dropped below its psychologically important 1,100 level.

Our Domestic Trend Tracking Index (TTI) followed suit, which supported our position to be out of the market (since 8/10/11). However, downside momentum disappeared as news reports from Europe regarding their newly designed master plan to bail out nations and banks, gave the bulls some hope and a slow rebound ensued.

As I posted throughout the month, we essentially went from the low end of the 2 month trading range back to the upper end, hovered there for a few days, and ended up breaking through it. As we slowly ratcheted higher, our Domestic TTI improved as well and generated a new ‘Buy’ signal for domestic equities effective as of 10/25/11, as the table above and the chart below show.

To be clear, the entire market rebound during October was based on nothing but hope and hype that the European summit would result in a solution that would solve all debt issues. While a plan was announced, many details are still lacking as to how exactly it will be funded and if leverage can actually be used.

Given that backdrop, I carefully eased into some equity ETFs as our Buy signal materialized. A 20% exposure to the Total Stock Market Index (VTI) along with a previous 5% allocation to Consumer Staples (XLP) represent our total equity allocation for most clients, along with 20% in the Total Bond ETF (BND) to balance out any sudden market drops. In other words, we’re engaging in a defensive approach and selected offense.

Europe remains front and center in terms of news attraction and, depending on the outcome of the Greek saga, followed by other country candidates on deck, can derail the current rally at anytime. Domestic economic data, while not terrible, still point to an economy that is stuck and going nowhere causing the Fed to utter words like “frustratingly slow.”

On a global basis, things are not improving either, and the main reason for the financial market to display a rally mode is the Fed’s intervention by keeping interest rates low.

Nevertheless, should upward momentum be sustained, I may carefully add to existing positions to stay in tune with current market direction. Our domestic TTI has crossed its trend line to the upside by +3.47% and remains in bullish territory as the chart shows:

[Click on chart to enlarge]

However, with this type of news driven market, a directional change can occur suddenly and without warning. That’s why our trailing sell stops will serve as a guide to give us the signal when it’s time to exit either bond or equity positions.

ETF Leaders And Laggards – For The Week Ending 11/4/2011

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Here is a quick ETF review of the past week’s Leaders and Laggards from my High Volume ETF Master list:

With the markets having pulled back sharply during the first two trading days of this week, this week’s top 5 Leader and Laggards listings more accurately reflect the current state of affairs, at least to my way of thinking.

With the Eurozone being pretty much out of control in regards to the debt crisis, the Laggards are, to no surprise, all Europe indexes with the exception of Brazil. Please note the sharp losses for the week along with the negative %M/A figures, which represent how much each ETF is positioned below its respective long-term trend line and therefore in bear market territory.

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