[Chart courtesy of MarketWatch.com]
It’s been a tough week for equity ETFs so far as the situation in European begins to nosedive. The S&P 500 dropped 2.21% while European and Asian indices also took a hit. And for the third straight day, investors headed for U.S. government securities as the 10-year U.S. Treasury fell to yield 1.88%.
Meanwhile, the dollar appreciated against the Euro to finish at $1.33/Euro. The Volatility Index also edged up 6.29% today as risk isn’t going away anytime soon. European fears have certainly risen considerably in the past week amidst uncertain governmental changes.
An indication that investor sentiment is falling to the wayside, Germany’s auction for 10-year bonds proved shambolic. Despite the fact that Germany is one of the fiscally responsible nations that others look to for financial assistance, it was only able to sell 65% of its bonds today. If Germany, the de facto Eurozone leader, is seen as risky, we better buckle up for a very bumpy ride. The contagion is spreading quickly, and no one is immune.
Aside from Germany, the fate of the rest of the Eurozone is still in limbo. Greece used to be the major talk, but its debt size pales in comparison to Spain, Italy, and other western European countries. The debt overhang is burgeoning at an accelerating rate as bond yields throughout the rest of Europe show no signs of falling and France is inching closer to a rating downgrade.
To combat some of these issues, the IMF announced that it was amending its credit facility lending program to include not only 1-2 year loans, but also 6-month loans, as liquidity becomes an increasing concern. The IMF will need to step up to the plate on a large scale as Europe clearly can’t contain its problems by itself.
In Asia, China’s drop in manufacturing for October, its lowest level since March 2009, only adds more woes to the global economic growth picture as we see worldwide contraction taking place. China and other Asian countries, especially emerging nations, are significantly dependent on European banks for funding, so the financial exposure can exacerbate their economic difficulties.
I’m not really surprised about how fast this contagion is spreading, and the extent to which it will affect U.S. markets especially, but that it took so long. As I posted yesterday, we liquidated our holdings in VTI, which not only triggered its trailing sell stop point but also has dropped below its long-term trend line.
In regards to trends, our main indicator, the Domestic Trend Tracking Index (TTI) is now flirting with a break below its respective trend line by hovering above it by only a slight +0.43%. Once a break below the line occurs, you should not hold any equity ETFs or mutual funds.
With the markets having taken a beating for 6 straight days, it is entirely possible that a rebound could be on the horizon. The unknown is whether that will turn into a dead cat bounce or into something more. Given that Europe’s issues won’t vanish overnight, my guess is that it will be the former and not the latter.
These are stressful times in all asset classes, so be sure to implement my recommended exit strategy.