Equities continue to march higher and, admittedly, it’s a trend that I didn’t think was going to turn out the way it has. In fact, I recently told listeners of my Monday Morning Market Outlook podcast that I’ve been wrong about the markets so far in 2012, and that the strength we’ve seen in stocks has been something that I didn’t anticipate.
Now, technically speaking, the major U.S. indices now trade well above both their 50- and 200-day moving averages. However, it’s not just U.S. markets that have powered higher in 2012. If we take a look at the chart below of the Vanguard Total World Stock ETF (VT) — a fund pegged to the price and yield performance of the über-broad FTSE Global All Cap Index — we see that this measure of the global markets also is trading above its 50- and 200-day moving averages.
In fact, the movement of the 50-day average (blue line) now is nearly breaking above the long-term, 200-day moving average (red line). If this takes place, we will have seen what technicians call a “golden cross,” which is a very bullish pattern that generally leads to more technical buying — and significantly more upside.
Yes, the technicals in this market are sound. However, when it comes to fundamentals, it’s a whole different story.
As we’ve seen with Greece, the European debt bubble continues to fester under the global economy’s skin. Ireland, Italy, Portugal and Spain are next, and how this debt bubble ends up is going to have a serious impact on equity prices in 2012. As for the U.S. economy, we’ve seen some growth of late, as well as some improvement in the job market, but this growth is by no means strong enough to keep fueling an equity rally indefinitely.
Ask yourself this question — if the U.S. economy is so strong, then why has the Federal Reserve pledged to keep interest rates at near-zero levels through 2014?
The point here is that I see a major disconnect between the technical action taking place in this market and the underlying economic fundamentals. The former indicator is screaming bull, and the latter one is yelling out bear.
So far in 2012, the fundamentals virtually have been ignored. But how long can the market turn a blind eye to the weak foundation on which this rally has been built? The answer is most likely not for very long. Of course, nobody knows how long stocks can sustain their bullish ways, but I know I am not interested in trying to jump on this bull’s back.
History tells us that when everyone is bullish, and when stocks have rallied out of step with the fundamentals, that’s the time when many investors get unceremoniously bucked-off.
I recommend not letting this unfortunate fate happen to you, or your money.
Not Out of the Greek Woods Yet
After seven months of difficult negotiations, Greece finally has won the 130 billion euros
in aid it needs to avoid the dreaded March bankruptcy. But that by no means is the end of this Greek tragedy. In fact, now that the bailout deal is done, investors already are weighing the prospect of a possible violation of the terms set forth in the current bailout deal.
Despite the new round of funding, Greece runs the risk of not being able to successfully implement austerity measures that would slash the nation’s debt to 120.5% of gross domestic product (GDP) by 2020, which would be down from last year’s dangerous 160% debt to GDP level.
If Greece fails to make the required cuts in its pensions, in the minimum wage, in health-care and defense spending, and in government-employee budgets, the danger of default will ramp up to red-zone levels. Such a move could take a serious bite out of the value of the euro, of European equity markets, and even of global equity markets.
I’m actually expecting the Greeks to fail on this front. Although I wish them well in their herculean austerity efforts, I just don’t think the political will or fiscal acumen is there to get the job done.
Now, in the chart above of the Global X FTSE Greece 20 ETF (GREK), we see that stocks in the troubled European nation surged in January on optimism over the bailout deal. However, since the bailout was announced, Greek equities actually have dropped sharply.
This price movement is telling, as it shows that the smart money isn’t convinced we’re out of the Greek woods yet. I agree.
ETF Talk: Ride the Market’s Rise with DIA
If you are hoping to profit from the market’s recent run-up, consider buying an exchange-traded fund (ETF) that gives you exposure to some of the best-established companies available. One way to do so is by investing in the SPDR Dow Jones Industrial Average ETF (DIA).
The fund seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the Dow Jones Industrial Average. Without question, DIA has been on a roll lately, as the following chart shows.
As of Feb. 21, DIA’s top sectors and their respective weightings are: industrials, 22.27%; information technology, 17.6%; consumer staples, 13.53%; energy, 11.37%; and consumer discretionary, 11.02%. As far as the fund’s top five individual holdings and weightings on Feb. 21, they consist of: International Business Machine, 11.28%; Caterpillar Inc., 6.71%; McDonald’s, 5.86%; 3M Co., 5.11%; and Exxon Mobile Corp., 5.05%.
On Feb. 12, DIA closed at $129.23 per share, after paying a dividend of 0.332. The last time the fund topped that level occurred on May 19, 2008, when the fund closed at $130.23 per share. The ETF’s rising share price may have been aided by positive fourth quarter and full-year 2011 results from Home Depot, Inc. (HD) and other companies that are doing well during a weak economy. Indeed, HD is DIA’s 16th largest holding, as of yesterday’s close.
The world’s largest home improvement retailer reported on that day that it notched sales of $16.0 billion for the fourth quarter 2011, a 5.9% increase from the fourth quarter of 2010. Comparable store sales for the fourth quarter of 2011 jumped 5.7%, and comparable sales for U.S. stores alone rose 6.1%. Also impressive is that Home Depot’s 2011 sales reached $70.4 billion, up 3.5% from 2010. In addition, the company’s comparable store sales for 2011 climbed 3.4%, and comparable sales for U.S. stores alone rose 3.0%. It seems apparent that the do-it-yourself market is on the ascent, amid economic weakness in other sectors.
Home Depot also announced on Jan. 20 that it had acquired Redbeacon, an online home services platform that connects consumers with contractors for their home maintenance, repair and remodeling needs. Based in San Mateo, Calif., Redbeacon assists homeowners in connecting with qualified local service professionals, so Home Depot now seems better positioned to compete for the business of online buyers to sustain its sales growth. Since people generally look for ways to save money in a weak economy, Home Depot is an example of a company that can grow in both good and bad times.
With DIA’s diversification, you can benefit from its holdings in stocks such as Home Depot, without risking all of your money on the fortunes of just one company. That benefit is a clear advantage of using ETFs.
If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.
Are You Ready for The Ultimate Income Strategy?
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On Optimism and Letting it Be
And when the night is cloudy,
There is still a light that shines on me.
Shine until tomorrow, let it be.
–The Beatles, “Let It Be”
No matter how down we may be in life, we still can find a light that shines on us. If you have your reason, and the will to act in your own self-interest, you can shine until tomorrow — not only for yourself, but for those you love.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.