January 15th, 2009

Cramer and EWZ, FXI and Other Intermational Markets

I promise, the Stock Chartist blog will not besolve into a Cramer critique. I will get back to the market, industry groups and individual stocks but I just can’t resist because he does provide such great material to dissect and learn from … especially now when he’s feinting (according to Dictionary.com “A deceptive action calculated to divert attention from one’s real purpose.”) to conduct a lesson on technical vs. fundamental stock market analysis.

Take last night’s look at the Brazil vs. Chinese stock ETFs. According to Cramer

“A look at the chart shows EWZ’s selling climax came a month before the index’s low in mid-November. Everybody who wanted out got out in October. So the eventual bottom in the low $30s had more to do with lack of buying than any increase in selling. Since that low, buyers have been more and more willing to purchase shares at higher levels. The lows, so to speak, aren’t as low as they once were. And in technical analysis, higher lows mean buyers are eager and sellers are less aggressive.

In EWZ’s case right now, the reduced volume indicates sellers are flat out exhausted. The Brazilian ETF looks to be “reverting to the mean,” which is technical jargon for the narrowing gap between EWZ’s current price and its average price over the past 200 days. The common wisdom among chartists is that once the price approaches that key moving average there should be some profit-taking, most likely around $50, $17 higher than the current price.”

But then he moved on to Brazil and said the Chinese ETF (FXI) and said

“He’d rather see investors buy a China fund, like the Xinhua China 25 Index his charitable trust owns. China’s up 5% for the year so far, and the Communist Party there has shown a willingness to do whatever’s necessary to jumpstart its economy. And with the Baltic freight index up 50% in the last two month, Cramer’s confident in China’s growth prospects.”

But as Paul Harvey says, “here’s the rest of the story” and it can be summarized in a few words: there’s been no place in the world to hide. Here is the performance of 7 international ETFs since the beginning of 2008 (shown as indexes):

Wow, they’ve all pretty much followed the same track. The best performing markets of the seven, on a relative basis, have been Japan and the S&P 500! One of the markets that’s done the least damage to portfolios has been the US? You couldn’t tell by looking at our news. The S&P 500 was down about 40% since the beginning of 2007 while the rest of the world was down 50% (except Japan). Of course the ETFs are somewhat depressed as compared to stock prices in local currency due to the strength of the $US since April 2007.

Let’s zoom in for a closer look (June 2008=100):

Here are some of the questions Cramer’s “instructional” look at EWZ and FXI raises:

  • If world markets have moved in tandem with the the S&P 500 less volatile than the others and if China and Brazil look like buys (China more than Brazil according to Cramer), why wouldn’t US stocks (S&P 500) also be a recommended buy?
  • Other than the fact that his charitable trust owns the FXI, shouldn’t he have recommend the Japanese ETF due its better performance (and, presumably, better prospects – his guess about the future is as good as anyone elses) or the Brazil ETF for a greater upside reversion to the mean?
  • Although he intimated as such, can FXI possibly move independent from the rest of the world (especially the US)? Or is the world so interconnected through trade that either we all go up together or we all continue to crash into a world depression.
  • Why did he not mention the impact of fluctuations in the $US in his “lesson”? With the $US fluctuating by over +/- 20% over the past three years, foreign stocks, commodities and precious metals will continue to be more volatile than US stocks.

I think the “inverse-” or “contra-Cramer” trade is still working so I’d go with Brazil and/or South Korea for the biggest upside potential when the whole world starts moving up together.

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