Key Indicators Flash Warning Signs

By November 26, 2010Weekly Writeup

It is not unusual for trading volume to decrease during a holiday-shortened week. Similarly, it is not uncommon for volatility to pick up in the absence of full participation.

Nevertheless, the overwhelming majority of exchange-traded stock funds fell for a 3rd consecutive week. Many International ETFs and Emerging Market ETFs have dropped below short-term trendlines.

With Euro-zone debt fears reamining, rather than fading… with China inflation concerns lingering, not dissipating… 3 of the 4 key risk gauges are now elevated. Specifically, Vanguard Emerging Markets (VWO) fell below its 50-day trendline. Meanwhile, both th U.S dollar and the CBOE Volatility Index (VIX) climbed above their near-term, 50-day moving averages.

 VWO 50

USD 50

VIX 50

The S&P 500 has been hanging a bit tougher. The current price is still higher than both the benchmark’s short-term and long-term (200-day) trendlines.

SPY 50

Keep in mind, though, world markets have been setting the stock trend for several years. The bear bottom for most Emerging Stock ETFs and many International Stock ETFs occurred in November of 2008, whereas the U.S. bear bottom occurred in March of 2009. This year’s steep correction for most Emerging Stock ETFs and many International Stock ETFs began early in 2010 and ended in May of 2010; in contrast, the U.S. market correction began in April and ended in July of 2010.

In essence, should foreign equities decline significantly, you should expect U.S. equities to do the same. You should also expect the former asset group to lead the way out of the muck… with U.S. markets picking up the rear.

It’s far to early to deem the decline in foreign stocks as serious. With that said, you may see some ETF Risk Levels on a heightened state of alert. I’ll contniue to keep you informed of additional developments.

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