A Leveraged Bet on a September Pullback

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

I am not quite that pessimistic. That said, I do think there is a good chance that markets will pull back 10% or so over the next few weeks, similar to the way they did in early June. After that, I expect global markets to resume their upward trend for a traditional Q4 rally.

The most challenging part of the Global Bull Market Alert portfolio during a pullback is your volatile holdings in Chinese stocks. So with the Chinese market off 10% over the last two trading days, I am temporarily moving your two positions in Baidu, Inc. (BIDU) and the Claymore/AlphaShares China Real Estate ETF (TAO) to a HOLD. I am doing the same for your positions in the iShares MSCI BRIC Index ETF (BKF), the SPDR S&P Emerging Markets Small Cap ETF (EWX) and the iShares MSCI Hong Kong Index (EWH).

That all said, now is the time of year when you want to position at least part of your Global Bull Market Alert portfolio to gain when global markets fall. The best way to do this is through a short-term bet against a big basket of emerging market stocks by buying the UltraShort MSCI Emerging Mkts ProShares (EEV). The performance of this ETF corresponds to twice the inverse of the daily performance of the MSCI Emerging Markets index. That means that as global markets swoon in September, this ETF will soar.

Here are a couple of things to keep in mind. This pick is a hedge against some long positions in your Global Bull Market Alert portfolio. That means it will zig while your other holdings zag. It is also a genuine short-term trade that you should not expect to hold for a long time in your Global Bull Market Alert portfolio. Finally, leveraged ETFs are linked to daily volatility, so they behave differently from what you may expect, outperforming on some days, underperforming the next. But since I don’t expect to hold this position longer than the next four to six weeks, the long-term effect of these distortions should be minimal.

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So buy the UltraShort MSCI Emerging Mkts ProShares (EEV) at market today and place your stop at $12.50. If you want to play the options, I recommend the $15 October calls (EOXJO).

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) fell slightly this week as the Chinese market’s weak performance weighed on this ETF. BKF is now a HOLD.

Baidu, Inc. (BIDU) dropped back slightly. Although this stock is a favorite among U.S. institutions that are unlikely to dump the stock on any short-term pullback, because of the sharp sell-off in the Chinese market in the last two days, I am moving BIDU to a HOLD.

The WisdomTree Dreyfus Emerging Currency ETF (CEW) dropped back slightly this past week. Although the long-term trend in this currency bet remains up, this is a defensive position that remains a HOLD.

iShares MSCI Chile Investable Market Index (ECH) pulled back slightly this week. It remains a HOLD.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) ended the week flat after the Bank of Israel became the first central bank in a developed nation to raise interest rates. The key interest rate hike to 0.75% from an all-time low of 0.50% came in response to the nation’s recent growth and the growing fear of inflation. This is a bullish sign for the Israeli ETF and EIS remains a BUY.

The iShares MSCI Hong Kong Index (EWH) pulled back below the $15.00 level last week, as Hong Kong weakened alongside China. Because I expect weakness in the Asian markets over the next few weeks, Hong Kong is now a HOLD.

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SPDR S&P Emerging Markets Small Cap ETF (EWX) hit $41.28, just off its record high for the year, before pulling back. I am positive on this leveraged bet on emerging markets and global economic recovery. But as we enter September, I am temporarily moving this to a HOLD.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) hit a high of $41.03 as copper hit yet another high for the year on Friday. With the global economic recovery firmly in the cards, Dr. Copper remains a BUY. Raise your stop to $36.50.

PowerShares Financial Preferred (PGF) fell back below the $15 level last week, as the market was unsettled by a downgrade in Dutch Bank IG, one of PGF’s component stocks. With over 68% of holdings rated BBB or better and over 90% rated B or above, the risk/reward equation for holding PGF remains intact. And you are also collecting a 10.1% annual yield. With the global economy turning, PGF is a BUY.

Claymore/AlphaShares China Real Estate ETF (TAO) fell back to just over the $17.00 level last week. With the Shanghai market falling nearly 7% overnight, I am moving TAO back to a HOLD.

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