Outlook Remains Defensive

The EuroZone crisis remains in place - although it has gained a respite from the “can being kicked down the road.” The question is when negative sentiment shall return; and we’ll posit sooner rather than later. European/Latin American/Asia-Pacific market ETFs remain archly lower off their October highs, but have begun to show strength above resistance levels...which is positive. The US ETFs have thus far remained immune to the contagion; but view the current price action as a drawn out topping process.

Further, “risk-on” vehicles - commodity and basic material ETFs - remain in bearish patterns; but seen positive gains have been seen in several given the annual Goldman Sachs Commodity Index (GSCI) reallocation. Regardless, we see the “risk-off” trade as coming to the fore after January-end, and extending through 1H-2012.

Short-term, we find the broader market is overbought, and we will consider the character of a correction into which we look to add long positions.

POTENTIAL LONG TRADES

√ S&P Energy (XLE) - a bullish pennant is evident, with recent weakness into moving average support having held. We find this bullish; and would like to see modest weakness before buying.

√ Oil Service (OIH) - prices yesterday broke out of a bullish pennant, which given the OIH/SPY ratio is at historically low levels - means we are buyers soon.

√ Coal (KOL) - the previous lows have held; but resistance has not yet been taken out to warrant long positions.

√ India ETF (IFN) - the downward sloping channel remains in place, but prices are rather far below their 300-dma.

√ Latin America ETF (ILF) - we’ve been bearish ILF, but a close at $49 or above would turn us rather bullish. Current prices stand at $46.28.

POTENTIAL SHORT TRADES

√ S&P Consumer Discretionary (XLP) - the highs are being approached; and we’ll expect them to prove their merit given the overbought models.

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