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Friday, December 9, 2011
MARKETS FINISH OFF THE WEEK STRONG – COULD THIS BE THE TURNING POINT FOR EQUITY ETFS?
Yesterday’s fears coming out of Europe seemed to escape the minds of investors as major market ETFs and equity ETFs rose today. The S&P 500 went up 1.69% and Europe’s indices were just as exuberant. In addition, the 10-year Treasury increased to yield 2.05%
The VIX fell below the 30 level once more, dropping 13.76% to 26.38. While I hesitate to say we’re in risk off mode, we certainly have entered a momentary period of reduced volatility, though that can change in one day.
Some of the major talk coming out of the EU Summit has been the UK’s refusal of EU treaty changes spearheaded by Germany and France. While 26 countries have agreed to fiscal unity which includes stricter measures of balancing budgets, UK Prime Minister David Cameron has remained resolute in his opposition. Although Germany and France have demonstrated some much needed leadership, it’s no guarantee that the Eurozone can be saved.
Despite a good day for markets in Europe, Moody’s handed out ratings downgrades to three major French banks: BNP Paribas, Societe Generale, and Credit Agricole. The situation doesn’t look so rosy for France’s public and private finances as ratings agencies have also suggested a ratings downgrade for France’s sovereign debt.
Currently, it’s slightly more comforting to see that Italian and Spanish 10-year bond yields have fallen below the dangerous 7% level, but that doesn’t detract from the long-term debt burden these countries have to pay down while trying to restore economic growth.
The ECB has implied that it would temporarily halt debt purchasing seeing as it has significantly intervened in markets to the dismay of some EU leaders. However, yields could quickly rise above 7% again if market sentiment weakens, which could again prompt steadfast ECB action. Already, Italy’s 10-year bond jumped to 6.5% today after having dipped below the 6% mark.
Also, Eurozone nations have decided to offer $267 billion in loans to the IMF to help the Eurozone as a whole. But Europe will surely still need outside assistance.
With regards to our trend tracking indices, the Domestic TTI is still above its long-term trend line at +2.82%, while the International TTI remains well entrenched in bear territory at -5.88%. As has been the case in the past few weeks, I am only selectively seeking some opportunities in the domestic equity ETF space, but international equity ETFs continue to be off limits for us.
Overall, it’s been difficult to gain a clear perspective on where markets may be heading short-term. Yet, we must look to the long-term given the information we have now, which suggests that primarily maintaining low risk assets via bond ETFs is the most logical choice at the present time.
Have a great week.
READER Q & A FOR THE WEEK
All Reader Q & A’s are listed at our web site!
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A note from reader Ian:
Q: Ulli: Thanks again for all your insights and wisdom you share with us neophytes. Would you be kind enough to use your current cutlist to explain which ETFs are worth buying, and your logic for such a recommendation? I really need to read your thoughts on how you parse the list and the criteria you use to determine which funds to purchase.
Thanks so much!
A: Ian: Much depends on your risk tolerance. I prefer buying back in when the domestic TTI is in bullish territory and when individual ETFs/MFs have also crossed their trend lines to the upside.
Take a look at Monday’s HV ETF Cutline report, and you’ll notice a few equity funds on the plus side. As an example, I have added a small position in DVY a few days ago, since it’s less volatile due to its dividend paying feature. There are several other ones and, as I have disclosed before, we have exposure in XLP as well.
Again, the final decision will have to be yours. I can only provide you with data to help the decision making process.
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