Investors are piling into stocks again. However, with 22.5% gains for the S&P 500 since the October lows, one may want to take a deep breath.
Consider the fact that the Bureau of Labor Statistics (B.L.S.) lowered the national unemployment rate to 8.3%. If you believe the B.S. (I mean, B.L.S.) report, corporations may be back in the hiring game. Yet the largest seasonal adjustments in employment data come in January, making the month a very poor predictor of future employment patterns.
And that’s not all.
In November, Americans were saving at a 3.5% rate. By December 2011, that number jumped to 4.0%. It follows that an improving labor market by itself may not translate into higher levels of economic activity. What’s more, even with record low mortgage rates, home prices are still pushing lower. If we don’t get a corresponding pop in real estate, we aren’t likely to benefit from the “wealth effect” – a powerful driver of consumption.
Even if you believe that certain sectors are undervalued, which they very well may be, and even if you see opportunity in beaten-down, resources-rich Country ETFs, most of them are currently “overbought.” Consider the reality that existed a mere 4 months ago. Stocks were at 52-week lows and, in many cases, 2 1/2 year lows. In a very brief period, a wide variety of these very same risk assets have jumped 20%-30%!
Of course, healthy bull markets typically experience pullbacks. And while the methodology for determining when a pullback might arrive differs from analyst to analyst, most would draw similar conclusions about stocks right now; that is, equities are ripe for a sell-off.
When an asset’s price is more than 10% above a short-term moving average like the 50-day trend-line, an asset may be “extremely overbought.” Run-ups of this magnitude are almost certain to slam into a profit-taking wall. Unfortunately, there are a number of Country ETFs that currently possess this dubious distinction, including Austria (EWO), Brazil (EWZ), India (INP), Russia (RSX), South Africa (EWZ) and Sweden (EWD).
The circumstances that many may be overlooking are those in the euro-zone. Specifically, the impact of the debt crisis can’t be minimized by simply assuming that Europe will muddle through a quasi-recession and come up with the money to save its sovereigns or its banks. More likely, debt flare-ups will serve as an excuse for profit-takers and short-sellers. In other words, if you’re intrigued by fundamentally “undervalued” ETFs like iShares DJ Oil & Exploration (IEO), you’ll need more clarity from the European Union as well as a price pullback.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.