EC Is It Over? 3 ETF Signals You May Use For Confirmation

Is the global economic landscape healing? Far from it. Does that typically signal good things for the U.S. stock market? No… but the U.S. Federal Reserve is extremely likely to keep overnight lending rates near zero for years to come. That discourages saving, yet encourages borrowing for the purposes of consumption and investment. Zero percent rate policy also encourages investors to cast aside huge warning signs that might otherwise drag equity prices into a legitimate corrective phase.

How powerful is the effect of the Fed in the current bull market cycle? The S&P 500 SPDR Trust (SPY) hit an intra-day all-time high of 201.9 on September 19. This exchange-traded tracker for U.S. large caps dropped all the way to an intra-day low of 181.92 on October 15; the 9.9% sell-off just missed the official correction mark of 10%. At the precise moment that this was happening – at a time when the Dow was getting clobbered for 450 some-odd points – out came media reports on recent comments by chairwoman Janet Yellen. She had expressed confidence in U.S. economic growth, even in the face of global economic headwinds. The Dow cut its losses by more than half.

On Thursday, October 16, the markets began free-falling again. The Dow slid 170 points before another media report surfaced. This time, the president of the St. Louis Fed, James Bullard, suggested that the U.S. Federal Reserve should consider extending its bond-buying program (”QE3″) beyond October due to market volatility and worldwide economic uncertainty. Are you serious? How do you go from the transition to normalizing rates in 2015 one minute to considering an extension on emergency level bond purchases the next? That’s the Fed, though. And the markets went from losses of 1%-plus last Thursday to flat-lining for the trading session; stocks have been rocketing higher ever since.

In essence, investors have been assured that the Fed will back-stop risky asset investment, regardless of valuations or high profile earnings concerns. In fact, it no longer matters whether or not bellwethers – companies like McDonalds, Coca-Cola, Google, IBM, Verizon – have significant issues. The broader ETF benchmarks like SPY can march forward, as long as there is a belief that the Fed can prevent a nerve-wracking downtrend.

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ETF Expert is a web log (”blog”) that makes the world of ETFs easier to understand. Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser ...

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