Today, I plan to share the investment insights Benjamin Graham, Warren Buffet’s mentor, gleane...
Investing Globally with ETFs
04/22/2010 1:40 pm EST
As someone who has followed many of the global markets for 20 years, the explosion in the number of global ETFs has been a great addition for both investors and traders. For several years, I wrote daily and even mid-day commentary on the Japanese and Hong Kong markets, but most in the US were not able to participate as the margins for the futures were prohibitively high and trading individual stocks was not possible for most investors. The only real way to do so was by way of a limited number of international mutual funds. Now there are so many county-specific ETFs that you can build a diversified portfolio that covers just those areas of the world that look the best from either a fundamental or technical standpoint.
The chart of the Dow Jones World Index shows a similar formation as many of the country ETFs considering that it has also failed to move above its major 61.8% resistance level, which stands at 248. The Fibonacci projection target, using the rally from point a to point b and then measuring up from c, was at 240 and was hit the week ending April 16. The rising wedge on the weekly chart is somewhat of a concern with key support now at 209. This index is up 84% from the close on March 6, 2009, through the close on April 16, 2010. This was a bit better than the 77% rise in the S&P 500.
The table above compares the performance of some of the country or regional ETFs from the close on March 6, 2009, through April 16, 2010. Some of the country ETFs bottomed well before the US averages, so clearly, one should trade or invest in these ETFs by analyzing each one individually. The best performer by a wide margin was Russia (RSX), but that is not too surprising as it is one of the more volatile ETFs and should only be traded by those who see their cardiologist regularly. It was followed by India (EPI), up 159%; Mexico (EWW), up 147%; and then Australia (EWA), which was up 133%. In all, there were 17 ETFs up 100% or more, but it should also be noted that this list is not all-inclusive. All of these trade decent volume levels, which should be checked closely before considering a trade. Trading low-volume instruments obviously increases the risk and demands that one use limit orders. It is not unusual to see low volume at turning points.
Let’s take a look at a few of these individual ETFs.|pagebreak|
The weekly chart of the Market Vectors Russia ETF (RSX) indicates quite heavy liquidation in the fall of 2008 before prices finally stabilized in November 2008. After a slight rally, RSX turned lower in February and March, but held above the prior lows, line 2. Very tight ranges were followed by a breakout above resistance at line 2, confirming the lows. RSX moved slightly above $26 in early June before an orderly correction that retraced just over 50% of the rally, as noted on the chart. In fact, the Fibonacci retracement and projection analysis works equally well on the ETFs, and you may want to prove this to yourself. In January 2010, RSX approached the $35 area before correcting back to the 38.2% support level. The decline tested the weekly uptrend, line 3, which is still a key level to watch.
Australia has been one of the stellar markets since the March lows, and the iShares Australia ETF (EWA) is up 133%. The weekly chart above shows a very solid bottom formation using the RSI. The RSI made its low in October, point 1, and then as EWA was making a slightly lower low in March, the RSI was significantly higher (point 2). The bullish divergence, line b, was confirmed when the RSI moved through its long-term downtrend, line a, at the end of March 2009. The Australian dollar has also been very strong as the AUD/USD hit a low of .6289 in early March and then traded above .9400 in November 2009. It is also interesting to note that the Australian dollar, unlike EWA, did not make a new low in early 2010. EWA’s weekly uptrend, line c, was broken in January, as was the bullish divergence support in the RSI, line b. Even though EWA has made new highs in April 2010, the RSI shows a potential negative divergence, line d. A drop in the RSI below its WMA and the February lows would be more negative as it would indicate a weekly top was in place.
One of the weaker-performing ETFs was the iShares Germany ETF (EWG), and the current chart is definitely concerning. The rebound so far has failed well below the 50% retracement resistance at $24.70, and unlike many of the other ETFs, it is still below the late-2009 highs. There is now important trend line support at $20, line a, and a drop below this years lows at $19.27 would be more negative as it would suggest a resumption of the major downtrend.
Lesson Continues on Page 3|pagebreak|
Even weaker is the iShares Japan ETF (EWJ), as it is up just 50% from the March 6 close, and the rally appears to be just a continuation pattern. The initial weekly downtrend, line b, and the 50% resistance, are just above $11. The longer-term weekly downtrend is at $13.40. Since last summer, EWJ has stayed in a range, lines c and d, with resistance at $10.80 and support at $9.10-$9.40. If this support gives way, a test of the 2009 lows is likely.
The iShares Mexico ETF (EWW) was one of the better performers during the time period as it moved through resistance in early May, line b, completing the bottom formation. Many of the weekly technical studies also did not confirm at the March lows. On the chart, I have added a simple trend following system as the red bars indicate that the eight-week EMA is below the 21 EMA, and when the bars are green, the 8 EMA is above the 21 EMA. This simple system did a pretty good job of getting you out in July of 2008, six weeks after the highs, and hopefully avoiding the plunge from $54 to a low near $21. EWW has first strong support from December 2009 and January 2010 at $48-$51. The major support now lies at $44.70 and the February lows, which have to hold in order to keep the uptrend intact. There is long-term trend line resistance, line a, in the $59 area.
So which country ETFs look the best technically? On a relative performance basis, those ETFs that have moved above the January highs—like the major averages—are the ones I would expect to perform the best going forward, and they are listed in the table above. Two of the ETFs, iShares Hong Kong (EWH) and the iShares MSCI Emerging Markets (EEM), have just barely moved above the January highs, so they should be considered as being weaker than the others. Most of the ETFs are somewhat overextended, so I would look for a pullback to moving average or chart support before considering a long position. Also, you should keep an eye on the weak European ETFs, because if they break below their February lows, it could put additional pressure on global equity prices.
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