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Friday, September 7, 2012
US EQUITIES EDGE UP ON FED STIMULUS HOPES; EUROPE RALLIES ON CHINA STIMULUS
US stocks continued their upward journey Friday with the major indexes settling higher for the first time in three weeks and extending multi-year highs amid hopes the Fed will restart its asset purchase program as early as next week following the European Central Bank’s decision to initiate an unlimited bond buying program.
I like to point out that the ECB has not actually “done” anything so far; at this time it’s been merely talk of potential action which got the markets on a sugar high. We’ve seen this before over the past couple of years as all the best laid and talked about plans fizzled out and eventually ended up in the trash bin.
Nevertheless, the ECB, as well as the Fed, have succeeded in jawboning the markets higher, which is the new normal in this central planning effort. How long this can continue is the big unknown, as economic fundamentals from around the world paint an entirely different picture than what the levels of the major equity indexes have you believe.
While this certainly may go on for a while, longer term we are setting ourselves up for a super crash, as the artificial propping up of markets can simply not end on a positive note.
The Dow Jones Industrial Average (DJIA) climbed 15 points, up 1.7 percent for the week. Within the 30-component blue-chip index, breadth remained evenly matched with half of the stocks finishing higher for the day even as the index hit its highest level since December 2007.
The S&P 500 Index (SPX) rose 6 points, higher 2.2 percent over last week. Materials gained the most while consumer stocks hit the ground hardest among its 10 business groups.
Snapping its four-day losing streak, Treasuries rose as weaker-than-estimated August jobs data triggered speculations the Fed will restart its monetary stimulus program to accelerate growth as early as next week.
Meanwhile, the euro jumped to a three-month high against the greenback after lackluster US jobs data fueled speculations of another round of stimulus from the US Fed. The dollar index, a gauge of the dollar’s strength against a basket of six currencies, fell to 80.182 from 81.089 in late Thursday trading.
European stock markets rallied Friday amid news of fresh Chinese stimulus even though gains were trimmed after US August jobs data showed a mere 96,000 job gains versus 141,000 in July. The pan-European Stoxx Europe 600 index rose 0.2 percent to close the week 2.3 percent higher.
Spanish and Italian 10-year borrowing costs continued to fall with the yield on Spanish 10-year bonds sliding 42 basis points to 5.60 percent while Italian 10-year bond yields dropped 26 basis points to 5.04 percent.
In Frankfurt, strong gains by Commerzbank AG and Deutsche Bank pushed the German DAX 30 index higher 0.3 percent on the day. The index has gained 3.5 percent over the week.
In the ETF space, gold and silver-linked funds surged while the dollar plunged on weak jobs data. The State Street SPDR S&P Metals & Mining ETF (XME) jumped 5.12 percent along with precious metal-linked funds amid reports that China will spend an additional $150 billion to boost a cooling economy.
The iShares Silver Trust (SLV) jumped 3.06 percent as silver futures sprang more than three percent on the day. The Van Eck Market Vectors TR Gold Miners (GDX) rose 2.71 percent as gold futures climbed more than $30/ounce.
This week’s feeding frenzy did affect our Trend Tracking Indexes (TTIs), which rocketed higher with the markets.
Here’s how we ended this week:
Domestic TTI: +3.75% (last week +3.06%)
International TTI: +3.67% (last week +0.99%)
Have a great week.
Disclosure: No holdings
READER Q & A FOR THE WEEK
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A note from reader Keith:
Q: Ulli: I’m confused as to why you did not issue an international buy signal (much quicker than you did), if you are making your decisions based on the numbers (rather than seasonality- September is approaching which is usually a down month).
I think when the trend line is broken by more than 1% a buy signal must be issued or else you are not following your own methodology!
A: Keith: I do the same thing whenever a trend line crossing to the upside occurs. I wait a few trading days to be sure that the break is for real and the crossing has some staying power. This simply reduces potential whip-saws signals, but it will not eliminate them.
If you are an aggressive investor, you can jump in earlier if you like. It’s simply my preference to approach this a little more conservatively at these lofty levels, but that does not mean you can’t act quicker than I did.
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