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 BusinessInsider.com 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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January 24th, 2012

The Outlook for FXI and Chinese Stocks

From the EconomicTimes of India:

“China’s economy is showing signs of slowing, with foreign investment falling for the second straight month in December and home prices dropping in most cities, the government said Wednesday.

The latest indicators came a day after data showed the economy expanded 9.2 per cent last year, narrowing from 10.4 per cent in 2010, as global turbulence and efforts to tame high inflation put the brakes on growth.”

From USAToday:

“China’s gross domestic product grew at its slowest pace in more than two years in the fourth quarter, and the worst may be yet to come, as weak exports and government tightening ripple through the world’s second-largest economy.

In the final three months of 2011, China’s GDP — the total value of goods and services — increased 8.9% from a year earlier. That was a fourth-consecutive quarter of slowing growth and the slowest expansion since the second quarter of 2009, when the economy grew 8.2%, the Chinese government said Tuesday.

For all of 2011, China’s economy expanded 9.2%, compared with 10.4% the year before.”

And finally, from The Guardian in the U.K.

“China’s economy is also “unstable, unco-ordinated and ultimately unsustainable”, a verdict delivered not by some capitalist running dog on a Canary Wharf trading floor, but by none other than premier Wen Jiabao. Nevertheless, any appraisal of China’s prospects must begin by admitting that the Middle Kingdom is the most astonishing development success story in the world today, and that its three decades of 9%-plus growth have been achieved in the face of widespread scepticism from foreign observers.”<

When we look at a chart of FXI, the ETF of Chinese stocks, we see a classic inverted head-and-shoulder or ascending triangle or any of a number of bottom reversals:

From the above chart it appears that the Chinese market would rebound in sync with the US market ….  should that come to pass.  The extent of that rebound, however, is bound by different constraints than the US market when viewed from a longer-term term perspective:

This short-term inverted head-and-shoulder may signal the beginning of a Chinese market recovery but a complete reversal of its long-term downtrend would also require a cross above a long-term descending trendline stretching back to the heydays of 2007 followed by a cross above the top boundary of what now looks potentially like a multi-year ascending triangle at 46-47.

The near-term inverted head-and-shoulders supports a move to 47 but moves above that need more umph and momentum to overcome their local economic and international trade challenges.

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December 16th, 2011

World Stock Markets are Correlated

If thanks are in order then it’s from me to all of you.  It’s because of you that I take the time to be analytic, to look at the forest instead of at the trees, to look in places and directions that are different than those we regularly hear and read about in the business media.  For example, when attempting to divine our market’s future we often see with blinders on.  We look at individual stocks, we look at the S&P 500 and we look at our economy but we don’t often to look at what might be happening to other markets around the world, something that’s relatively easy to do these days because of ETFs.  I scanned those ETFs and was surprised by what I found.

In an article in today’s Reuters, “Stock markets have become so highly correlated to one another that it can feel like a one decision world: in or out.  The massive and global nature of the series of related financial crises since 2007 have robbed diversification of much of its value. Nearly every asset class is now closely correlated.”  The article quotes a study by Societe Generale that “a massive increase in correlation, from about a .5 correlation in the early 1980s to nearly .9 percent in recent months.”

The same seems to be happening to the returns generated by the “Herd”, the hedge funds who get paid huge fees to generate better than average returns on the large sums of money they manage.  According to Reuters, “these correlations in the 1990s were at about the .6 level, now they are topping the .9 mark, begging the question of why investors are paying expensive managers.”

We can’t explain the new correlation or, for that matter, care to know the cause.  The point is that “Diversification was the low hanging fruit of wealth management” and due to the increase in international trade, it’s no longer available.  We can see it in the ETFs of stock markets around the world; I could have picked more from the 30 some ETFs but you get the picture (click on image to enlarge):

  • Brazil: a possible double-head reversal top
  • Hong Kong; a surrogate for various Asian markets, including China
  • EAFE: 22 developed countries in Europe, Australasia, and Far East other than US and Canada
  • S&P 500: an argument can be made for forcing a reversal top, in this case an emerging head and shoulder formation, on the S&P 500 Index

We’ve spent a lot of time and emotional energy trying to figure out in which direction the market will break out of the trading range. We waiver back and forth depending on the news out of Europe. We turn optimistic when we finally start getting a little bit of positive news on our economy (like “things aren’t getting worse” or “things are slowly getting better”). Bottom line ….

  1.  in today’s market, diversification gives way to market timing and
  2. we might fair no better than other world markets and have to endure a further 20-25% decline before we’ll see a bull market trend begin.

Like it or not, truly, today We are the World.

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October 18th, 2011

Cramer, the Windsock

I went out a limb Sunday night and found on Monday that I was in good company. As Cramer said in tonight’s show: “On Monday, highly regarded Wall Street technician Burt Dohmen sent the “Mad Money” host a chart that painted a very bleak picture for the market.”

It’s interesting that Cramer said that regardless of the good earnings reports yesterday, our stock market was being driven buy Prime Minister Merkel in Germany. On Monday he said,

“It’s not that the earnings can’t be trusted, it’s that the futures are too powerful and their levels are set in Europe, not here…..the market sold off hard as investors grew nervous following news there ‘during the upcoming summit’, according to Germany’s German Finance Minister. Wolfgang Schaeuble said European governments will not resolve the crisis at the EU meeting scheduled for Oct. 23.”

If the market had gone up instead yesterday he probably would have said it was because good domestic results trump anything happening in Europe. He tells a good story that follows the market but he doesn’t say anything that would allow you to cobble together a strategy that’s valid beyond his next show.

But that was just 48 hours ago. Tonight he said: “But right before Tuesday’s close, Dohmen changed his mind and now takes the opposite view. Why? Because the facts changed … the charts changed and his reading of them changed too, which is how it’s got to work.” What did he see and, since we’re looking at the same data, am I changing my point of view also? Here’s the picture (click on image to enlarge):

Yes, the Index did cross above the upper boundary of the trading range but it fell below the lower boundary just a couple of weeks ago [interesting that the talking heads neglect to mention that in their crowing about today's late-day move]. But about the only ramification of that breakthrough was to sucker me in to buy more 3xShort Index ETFs. There was no follow through; in fact, the market surged a quick 6-7% to today’s close. Not only is the market trying to convincingly escape this trading range but it will next have to cross above the two descending longer-term moving averages (100- and 200-day).

It is correct to say that when facts on the ground change, you have to change your strategy. The biggest challenge is identifying as unequivocally as possible what the facts truly are. I’m awfully close to admitting that. A close above those two moving averages would push me to moving from a net short position to 10-15% net long.

April 12th, 2011

Chernobyl, Fukushima Dai-Ichi and the Market

I’m always on the lookout for things to write about and subscriber questions are always an interesting place to begin. For example, someone wrote this morning asking the following:

“Japan has now raised their reactor crisis to Level 7, the highest level and equal to the Chernobyl disaster. Is there any chart information from the Chernobyl disaster that might help us?”

At first I thought linking a nuclear reactor disaster to the US stock market was unusual but, after giving it some more thought, I realized that actually there was value in looking back to see how the market reacted then and comparing it to what might happen in reaction to the current one. Understanding similarities and differences between the two events at the disaster and the market levels could, after all, be quite meaningful.

The Chernobyl disaster occurred on 26 April 1986 at the Chernobyl Nuclear Power Plant in the Ukrainian SSR (now Ukraine). An explosion and fire released large quantities of radioactive contamination into the atmosphere spreading over much of Western Russia and Europe. It was considered the worst nuclear power plant accident in history, and it was the only one classified as a level 7 event on the International Nuclear Event Scale until the Fukushima I nuclear accidents of March 2011.

The battle to contain the contamination and avert a greater catastrophe ultimately involved over 500,000 workers and cost an estimated 18 billion rubles, crippling the Soviet economy……Estimates of the number of deaths potentially resulting from the accident vary enormously: the World Health Organization (WHO) suggest it could reach 4,000; a Greenpeace report puts this figure at 200,000 or more; a Russian publication, Chernobyl, concludes that 985,000 excess deaths occurred between 1986 and 2004 as a result of radioactive contamination. (from Wikipedia)

The market’s reaction at the time was as follows (click on image to enlarge):

It might first appear as though the disaster damaged the market by stalling attempts to move higher as the S&P 500 Index began trading in an 11% range between 229 and 254. If Chernobyl did have a direct relationship to the consolidation pattern during most 1986 then it pales by comparison, however, with the market’s own melt-down and the largest one-day percentage point loss on Black Monday in October 1987 a little over a year later:

Put in an even longer-term picture, Chernobyl appears as little more than a bump in the road of the longest bull market in history that began when the S&P 500 successfully first crossed above 125 (Dow Jones Industrial Average above 1000) in 1982 and ended with the bursting of the Tech Bubble in 2000:

It’s difficult making “if-all-things-are-considered-equal” sorts of comparisons because Russia in 1986 was different than Japan and the world economy and trade are today. I would say, however, that the market today is at about the same early phase in coming out of the current secular bear market that begab with the Tech Bubble Crash in 2000 as it was in 1983 coming out of 1966-1982 secular bear market. If, in fact, we are in the early phases of this recovery then, over the long-run, the Japanese nuclear disaster will also appear as a blip on future long-term charts.

Thanks for the question, Chuck.

November 3rd, 2010

Trading Stocks 24x7x24

As you know, like most other technicians, I see 1220 as a crucial hurdle (that’s the market’s previous high set in April). The market’s crossing above that level with any sort of volume it should clear the way for a sustained bull market since there is only a brief respite at around the 1310 and then a clear shot at the all-time high of 1550. Let me tell you what I’ve been doing while I’ve been waiting for the market to assault the 1220 resistance level.

I was scrolling through my chart system the other day and again noticed the continually shrinking number of US-based stocks among all those in the database. Although the total number is around 7500 charts, less than 5000 of them are actually stocks. The rest are ETFs, preferred stocks, funds and stocks that are no longer trading due to acquisition. Of the total, about a third are ADRs (American Depositary Receipts of foreign stocks). Interestingly, most of the IPOs (initial public offerings) actually are Chinese rather than US stocks.

The simplest way to own non-US stocks is by way of ETFs and there are currently over 50 long and short ETFs of foreign stocks. Most are capital-weighted so a large percentage of the funds are in stocks that are also available on an individual basis as ADRs on US-exchanges. FXI, the Chinese ETF, also includes stock in a large number of smaller, non-ADR, companies but their representation is much less because they have smaller capital values.

So far, Fidelity offers trading in stocks listed on the following non-US exchanges:

But it’s a much bigger world out there than just Europe; here’s a list of some of those Far Eastern exchanges:

You need to add several Indian exchanges to the list for good measure.

I’ve been looking for charting software plus sources for end-of-day closing data (current and historical) for foreign stocks traded on their local exchanges. The benefit of my technical and charting approach to my stock market activity is that I can approach foreign stocks as if they were commodities. I could let the local investors, both professional and individual, conduct the fundamental business and financial analysis on the companies themselves.

They make their own decisions as to whether the stocks are over- or undervalued while I could piggyback on their investment decisions by focusing on the supply and demand dynamics for the stocks themselves.

I’ve discovered two sources offering free software that I’m learning and experimenting with:

I’m still learning and experimenting but who knows, one day in the not too distant future we may be trading for 24-hours on 24 international stock exchanges in any one of 20,000 stocks (how about this … 24 x 7 x 24). There’s no way fundamental analysis works in this environment; technical analysis finally wins.

October 7th, 2010

Three Simple Rules That Explain Everything

I’m intrigued by two dramatically different charts that I’d like to bring to your attention: EEM and GLD. I’ve superimposed onto both of these the S&P 500 (in blue) for comparison purposes. Before saying another word, let me show you what I’m talking about (click on images to enlarge):

  • EEM vs. S&P 500

    The take-away from this chart is that both the U.S. and the Emerging Markets had similar declines from the 2007 to the 2010 peaks, EEM has be able to break above that trendline (solid red) while the U.S. is struggling just now to break above its trendline (dashed blue). I fall back on the mid-term election year market cycle I wrote about back in January along with the trickle of better economic news (leaving the politics of it aside) and count on the U.S. markets to follow the rest of the world to higher ground in 2011.

  • GLD vs. S&P 500

    The take-away from this chart is the huge divergence between GLD and the S&P 500. Listening to the day’s market reports you’d think that the world began in the morning. The reports usually are shouted as if they were actionable alerts, critical turns, outstanding price movement. In fact, the real story stretches over years. While it’s true that GLD has seen some dramatic volatility, it has been in a fairly steady uptrend. Will this move carry GLD up to 200+, where the top boundary extrapolated might wind up? No one can say but I’d say the odds are pretty good if you have the patience (and the world’s central banks don’t spoil the party.

If you key your eye on the long-term rather than day-to-day fluctuations, I believe the following three wonderful phrases encapsulate just about all you’ll ever need to know about the stock market:

  1. “Trends, once established, have greater odds of continuing than of reversing.”
  2. “Focus on the turns and the trends will take care of themselves”
  3. “Extremes tend to always revert to the mean”

How could that apply to GLD and EEM?

  • GLD is in a trend that will continue. It is approaching the mean today, will probably go to an extreme above before trend reverts back to the mean.
  • EEM is breaking out of the year-long consolidation to continue its uptrend. The rest of the world, including the US will follow suit soon.

October 3rd, 2010

EEM: Expanding Triangle or Consolidation?

At the beginning of April, as the US stock markets were touching new post-crash highs, I wrote in a piece about foreign markets entitled “Some Opportunities Overseas“:

“stock markets around the world have been gaining ground. If you’re leery about the US markets, take a look at how constructive foreign stock markets have been recently. In short, foreign stocks, especially those in emerging markets, have convincingly broken out of a six-month consolidation (leading US markets) and are now forging ahead.”

Immediately after that appeared, the European debt crisis hit when S&P downgraded Greek debt and fears of sovereign debt risks caused investors to stop buying financial securities of any kind in Europe and the Euro plummeted raising thoughts of parity with the $US and talk of breakup and dissolution of the common currency.

Those fears seem to have now abated as the Euro has rebounded. China seems to have checked its inflation fears and Brazil is booming. World markets didn’t crash but instead extended their consolidations. The chart of EEM (Emerging Market etf) now looks like an expanding triangle (click on image to enlarge):

The pattern is quite rare but when it does appear, it usually signals a top reversal. One commentator described it as follows: “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.”

I want to believe that the EEM will break out on the upside driven by upward movement of the underlying securities. Perhaps it’s only my eyes and if you peer closely enough you can actually make out a pair of horizontal trendlines (marked as dashed-blue) which would recast the 12-month pattern as a nice long consolidation out of which the EEM has already broken on the upside.

I wish charting sounded more precise and certain but it often does boil down to nothing more than perception. Some of the underlying stocks look like they’re making some really strong upside moves. Here are the current top 10 holdings by market value for stocks available here as ADRs:

  • PBR (PetroBras – 2.90%)
  • VALE (Vale – 2.69)
  • CHL (China Mobile – 1.87%)
  • ITUB (Banco Itau Holding – 1.54%)
  • TSM (Taiwan Semi – 1.50%)
  • HBD (HDFC Bank – 1.43)
  • BBD (Banco Bradesco – 1.39%)
  • INFY (Infosys – 1.33%)
  • PKX (Posco – 1.10%)
  • IBN (ICICI Bank – .99%)

If you want to do your own research, click here for a spreadsheet list.

September 22nd, 2010

China is One Big Greenfield Project

For those of you unfamiliar with him, I recommend you read Thomas Friedman of the NY Times. In an OpEd piece today entitled “Too Many Hamburgers?” The passage that really caught my eye was:

“With enough cheap currency, labor and capital — and authoritarianism — you can build anything in nine months……But have no illusions. I am not praising China because I want to emulate their system. I am praising it because I am worried about my system. In deliberately spotlighting China’s impressive growth engine, I am hoping to light a spark under America.

For democracy to be effective and deliver the policies and infrastructure our societies need requires the political center to be focused, united and energized….. For democracies to address big problems — and that’s all we have these days — requires a lot of people pulling in the same direction, and that is precisely what we’re lacking.”

It reminds me of something from a while back, “Becoming A “Go-Ahead” Nation … Again” in which I had written:

“No wonder the stock market can’t move ahead. And it won’t until it finds new technologies, new industries, new growth vehicles, new catalyst to spark this century’s “go-ahead” enthusiasm. That’s where the country’s leaders should be focused…..Rather than punishing the majority, they should fund technological innovation, incentivize capital investment, reward risk taking and innovation, spur hiring.”

Ah, great minds thinking alike (with no disrespect meant nor intended, Mr. Friedman).

Graduate school was so long ago that there isn’t much I remember from it but one thing that has stuck was a class discussion comparing the US steel industry with those of Germany and Japan (without giving too much personal information away, let me say that the discussion could have taken place anytime between 1965 and 1975).

Those two economies were devastated by World War II and yet their steel production capacity was more efficient and profitable than ours. Our behemoths were US, Bethlehem and Inland Steels; theirs were both small specialty and large commodity producing mills. How did they do it? The answer was in the fact that they didn’t have any “legacy mills” to refurbish. Their whole economies started as greenfield projects, with their slates wipe clean because of the War, they had no legacy projects, they were building from the ground up.

The situation is true of China today. Not only do they have cheap labor and an authoritarian regime as Friedman points out, but they also are starting from the ground up, with greenfield projects, with little in the way of legacy plant and equipment that needs to be refurbished. That’s why they can build bullet trains, new train stations and new convention halls (see the Friedman article).

When’s the last time you heard of a new train station, airport, convention hall or rail line being built here. Have you heard of new bridges, dams, hospital centers or universities being built. About the only thing we build these days are sports stadiums.

Competing against the Chinese (and we have to think in terms of competing because not competing means stagnating, falling behind becoming second rate and withering away) begins by reallocating our Federal budget, cutting our defense spending (yes, perhaps ending the wars) and shrinking our global footprint so that more of our human and material resources can be redirected to those things that will help us compete in the 21st Century.

In the meanwhile, you investors keep one eye on FXI. By the way, the Chinese symbols read “The journey of a thousand miles starts with a single step”

May 16th, 2010

A World-Wide Bear Market

I may have been the one with the blinders on. At the beginning of April, in “Some Opportunities Overseas“, I suggested that many investors were acting like horses with blinders on by not taking a look at foreign markets, inserted some charts with what looked positive trends and wrote:

“With all this doom and gloom [referring to our economy and the deficit] how could stocks go up and why should anyone put their money at risk instead of leaving it in money market accounts? Nevertheless, while there’s a nice chunk of money parked on the sidelines, stock markets around the world have been gaining ground. If you’re leery about the US markets, take a look at how constructive foreign stock markets have been recently. In short, foreign stocks, especially those in emerging markets, have convincingly broken out of a six-month consolidation (leading US markets) and are now forging ahead.”

Instead of wearing blinders, I now a feel like nothing less than the other end of a horse. The Euro is sinking, the European Union economy looks like it’s in shambles and China is looking to put breaks on their own real estate and economic run away economy. Today looks like the polar opposite of what we saw on April 2. Rather than the world’s laggard economy, the US and $US now is touted as the world safe haven.

What appeared to be breakouts now look like heads on potential head-and-shoulder (or double-tops, horizontal channels or descending triangle) top formations in many of the world’s stock markets. In many ways, they now look just as precarious as does the US stock market. Note how many of these indexes have crossed below their 200- or 300-dma’s and that many of their moving averages have actually turned down. Also check out the OBV volume indicators (click on images to enlarge):

  • EWZ (Brazil)
  • FXI (China)
  • EWT (Taiwan)
  • EWA (Australia)
  • EWH (Hong Kong)
  • EWS (Singapore)
  • EWU (U.K.)
  • EWG (Germany)
  • PIN (India)
  • EWQ (France)

This is a world-wide phenomena. All countries around the world have run out of money, including the US. Anyone who thinks we will weather this and not be impacted must be living on another planet. Gold is quickly replacing the $US as the world’s reserve currency (the store of wealth).