December 3rd, 2012

New Geographic Diversification Opportunities Emerging

Our economy and markets have been the world’s top dog for so long that we sometimes take a parochial view of investment opportunities but the time may have arrived when we should beyond our borders to incorporating some foreign exposure into our portfolio.  For that matter, it may be time to dust off the old “geographic diversification” mantra.

This view that I’ve been thinking about for the past several weeks was echoed in some recent statements by the big boys on Wall Street.  As reported in last week,

“Goldman sees this reversing. Growth is expected to bounce back, and Goldman is above consensus in its BRICs growth estimates.

In BankAmerica/Merrill Lynch’s equity outlook, it also sees a return to over-performance among companies with foreign exposure.”

What piqued my curiosity in the first place were the similar bottom reversal formations that have been evolving in many of the foreign market ETFs.  The last time I thought about foreign markets was in October 2010 in a piece entitled EEM: Expanding Triangle or Consolidation? in which I included a chart of the EEM and quoted the following typical evaluation of that sort of pattern:

“The expanding (widening) triangle becomes formed when prices behavior makes a sequence of ascending maximums and descending minimums. This pattern indicates that the market is getting the state of hysterical instability. Bears and bulls are panicking. Their combat is getting too hot for the ascending trend continuation. So to say, the expanding triangle “kills” the ascending trend.”

The EEM chart updated to today is:

EEM’s price did continue advancing slightly for another 3-6  but then corrected around 30%; it’s about the same level as it was two years ago.  The dramatic difference, however, is that rather than expanding the triangle has the appearance of a conventional symmetrical triangle.  Furthermore, a flat volume trend as measured by OBV has carved a supportive “positive divergence” relative to the declining price trend (although one could also argue that price has likewise remained flat since it’s fluctuated within the triangle.  This chart supports the view that emerging markets could be on the verge of an upside breakout.

In yesterday’s Weekly Recap Report to Members, I included the following long-term chart of the S&P 500 in which I inserted what I call the 2011-2012 Sovereign Budget Crisis Congestion.  The area during which world markets have been struggling with the uncertainties brought on by the Euro debt crisis and our own budget negotiation debates.

When you look at many of the foreign market ETFs, it looks like there’s a chance that stock markets around the world at least are close to breaking the stranglehold of their uncertainties.  In much the same way that the trend of the Emerging Markets ETF looks as if its in a bottom reversal, the same could be said about many other foreign ETFs (click on symbol for chart):

  • EWA (Australia)
  • EWD (Sweden)
  • EWG (Germany)
  • EWH (Hong Kong)
  • EWJ (Japan)
  • EWK (Belgium)
  • EWM (Malaysia)
  • EWN (Netherlands)
  • EWQ (France)
  • EWS (Singapore)
  • EWT (Taiwan)
  • EWU (United Kingdom)
  • EWY (South Korea)

Do you see the same similarities as I do?  Do you see the same diversification opportunities?  Perhaps we’re closer [perhaps another year] to exiting the 12-year Secular Bear Market than we might imagine.

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