[Chart courtesy of MarketWatch.com]
January’s gains extended into this month as the S&P 500 jumped 1.12% while European and Asian indices were also in bullish mode.
Meanwhile, the Euro rose to $1.32/Euro while the 10-year Treasury rose to a yield of 1.83%. Although market volatility has tempered, there is still plenty of risk lying around.
The head of the IMF recovery effort in Greece, Poul Thomsen, conceded that austerity will only have a negative impact on Greece. Although the debt needs to be cut, stunting economic growth will put Greece back even further. As I’ve previously reiterated, the cards are stacked against Greece and throwing more bailout funds is no guarantee that Greece can get back on a fiscally responsible track.
Yesterday, I mentioned how European banks are looking to access more loans from the ECB. However, an ECB survey indicated that banks actually reduced lending toward the end of 2011 despite the fact that they took on more loans. Rather than using these funds to lend to businesses, banks are trying to replete their capital shortfalls. In a nutshell, this is a discouraging sign for credit markets, and in turn, the real economy.
Despite some negative data concerning business activity yesterday, there was a rise in manufacturing activity in December as reported by the Institute for Supply Management. Even Europe and China had an increase in manufacturing. However, we need to see a long-term positive trend, which still has to be established.
With regards to China though, there are troubling signs. For instance, China’s property market appears to be overheating while a reliance on exports and state driven investment is an unsustainable model if China wants to become a major economic power. Last week’s Economist feature further stresses the need for China to evolve its economic system. If not, we could see more friction between the U.S. and China as well as between Europe and China.
As our Domestic Trend Tracking Index (TTI) has confirmed by its position of +4.66% above its trend line, we clearly remain in bullish territory. While I have added equity and sector ETFs during the past month, they are balanced by an appropriate allocation of various bond ETFs, in order to reduce portfolio risk should markets pull back all of a sudden.
Today, our International TTI finally crossed its respective long term trend line to the upside by +0.81%, after having been stuck in bear territory since 6/16/2011. I want to see some more staying power above the line before declaring a new Buy for this area.
Stay tuned for the latest updates.