Most ETFs tracking the major U.S. indices have been dancing around their 200-day exponential moving averages in a volatile and trendless market dominated by European headlines.
The last month has been a major bummer for the markets. The Facebook (NasdaqGS: FB) IPO bomb has further damaged already frail investor sentiment. Seeing Facebook CEO Mark Zuckerberg in Italy for a honeymoon doesn’t really give shareholders a good feeling.
In this uncertain market, it’s OK for investors to keep powder dry, but it would be a mistake to give up completely on stocks.
Many financial advisors and trend followers use the 200-day moving average when deciding how much to allocate to U.S. stocks. If that technical indicator survives the current test, investors could see the market rebound sharply to kick off the summer.
ETFs tracking some of the market’s strongest sectors in 2012 such as homebuilders and biotech remain well above their 200-day moving averages despite the recent turbulence.
Of course, there are many reasons to be cautious. A surging dollar and U.S. Treasury yields at record lows are clear signs that investors are worried about deflation or a credit event in Europe. [Treasury ETFs Hit All-Time Highs]
Investors are frustrated, with good reason. Wednesday’s sell-off erased the previous session’s rally and then some. Longer term, buy-and-hold investors have seen the S&P 500 go nowhere the past decade. The past 10 years have illustrated the benefits of a trend-following strategy designed to minimize losses in down markets. [An ETF Trend-Following Plan for All Seasons]
However, some of the best times to buy stocks are when blood is in the streets and sentiment is in the gutter. For example, speculators are extremely bearish on the euro and individual investors appear to have thrown in the towel on equities.
Anecdotal evidence paints a similarly bleak picture. For example, a recent Financial Times story proclaimed “the end of a six-decade passion for equities.”
“The story may evoke a feeling of déjà vu for some. Especially those who read the August 13, 1979 edition of BusinessWeek, which famously also announced ‘the death of equities,’” FT Alphaville remarks.
Just remember, that 1979 BusinessWeek cover marked the opening phase of one of the greatest bull markets for equities in U.S. history.
S&P 500
