How to Clean Up on the Broken China

03/15/2011 12:34 pm EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

While agile traders might consider a leveraged short ETF, investors would be better served waiting in cash, writes Paul Goodwin, editor of the Cabot China & Emerging Markets Report.

The Halter USX China Index tracks the performance of the 200 or so Chinese stocks that trade as American Depositary Receipts (ADRs) on US exchanges, giving us a snapshot of how China stocks are doing.

The index made a couple of two-month advances in 2010, one in February and March and another in September and October. But much of the year was spent trading sideways. [It hasn’t done much of anything this year, either, now down marginally for 2011 after dropping more than 2% today—Editor.]

Oil prices are high, and so is investor anxiety as the murderous loon in charge of Libya tries to cling to power.

Investors hate uncertainty more than anything (except, perhaps, reporting and accounting fraud) and markets have reflected their discouragement.

My approach to stock investing has a strong market-timing component, so I’m advising readers to dial back their exposure to the emerging markets. This involves curtailing new purchases and tightening loss limits.

As a matter of principle, I avoid trying to predict what markets will do, whether it’s for tomorrow or next year. The simple fact is that no one can consistently predict where the markets are heading.

Three Bears in a China Shop
But if you have a sense of adventure and a strong opinion about what’s going to happen in China and the other emerging markets, I have an exchange-traded fund that may interest you.

If you’re convinced that China is in for a steep correction, and want to cash in on that dip, you should consider the Direxion Daily China Bear 3X Shares (CZI). This ETF will move triple the opposite (or inverse) of the price performance of the BNY China Select ADR Index.

A big pullback in China would be highly profitable for this leveraged short fund. Just be aware that such a leveraged ETF is more of a short-term vehicle, not a long-term holding.

I don’t advise it, of course, because it’s a bet on the future of an entire market. That means you can’t—as you could with an individual company—get any insight into a business plan, revenue and earnings history, management, barriers to entry, debt, product mix, strategy or any of the other bits of data that due diligence can accomplish.

Personally, I prefer going to cash when the wind is in the wrong direction.

But if you have a hunch and want to make good money if you’re right, here’s your chance.

Subscribe to the Cabot China & Emerging Markets Report here…

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