Global Bull Bets on a Pullback in Global Markets

Nicholas Vardy

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

This week’s Global Bull Market Alert pick, the UltraShort MSCI Emerging Mkts ProShares (EEV), is a short-term trading bet that the pullback in global markets will continue. EEV gains twice the amount that the MSCI Emerging Markets Index falls. Here’s why I expect EEV to perform well over the coming week or so.

Global markets have not exhibited much of a sustained trend since the sharp plunge in May. With global markets swinging 7-8% in a matter of weeks in both directions, a short-term leveraged bet like EEV is perfect to generate quick profits from just such markets.

The U.S. market’s pullback on Friday also failed some widely followed key technical levels. Last week, the S&P 500 experienced a “death cross” where the 50-day moving average crossed the 200-day moving average. Technicians see this as a sign of a long-term shift to a bear market in the United States. The irony is that the MSCI Emerging Markets Index — against which you are betting with this week’s Global Bull Market Alert pick — already had experienced its “death cross” just about a month ago. That, of course, failed to make any headlines.

In addition, last week marked the third time since the "flash crash" in early May that both the S&P 500 and Nasdaq have tried to overtake their 50-day moving averages, but fell short. In fact, Friday’s drop was so sharp that the market sliced through both its 20-day and 10-day moving averages. These technical factors all add up to a market set for a decline.

Finally, the drumbeat of negative fundamentals about the U.S. and global economy is growing stronger. Both the NY Fed’s Empire State Manufacturing Survey and the Philadelphia Fed Manufacturing Index confirmed a slowdown in the U.S. economy last week. Several measures of consumer confidence are down along with retail sales. On the global front, government debt in both Portugal and Ireland was downgraded by Moody’s. And the Baltic Dry Index, a widely followed measure of global trade flows, has moved down sharply in recent weeks. None of this adds up to good news for global stock markets.

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So, buy the UltraShort MSCI Emerging Mkts ProShares (EEV) at market, and set your stop at $47.80. There are no options on this one.

Here are a couple of important caveats. This is a bet on a short-term pullback in the markets. As a result, you can expect to close this trade within the next 10 days or so — perhaps even sooner. So keep an eye out for a “special alert” during mid-week. EEV also is a leveraged ETF, which means it isn’t appropriate for longer-term holders.

You also were stopped out of the PowerShares DB US Dollar Index Bullish ETF (UUP) at a slight loss.

Portfolio Update

iShares MSCI Chile Investable Mkt Idx (ECH) broke through the $60 level last week for the first time since late January, before pulling back in Friday’s sell-off. With a pullback in markets looming, I am moving ECH to a temporary HOLD.

iShares FTSE/Xinhua China 25 Index (FXI) fell below the $39.00 level last week. With global markets pulling back, I am moving this bet against China back to SELL SHORT.

SPDR Gold Shares (GLD) fell back slightly last week, as gold dropped out of the headlines. GLD now is a HOLD.

Global X/InterBolsa FTSE Colombia 20 ETF (GXG) rose 2.7% in its first week in the portfolio. As I expect global markets to pull back in the coming few days, there will be a better time to add to your holding in Latin America’s “bad boy.” GXG now is a HOLD.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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Global stock markets traded up last week on improving sentiment and news that China's exports rose 35% in June. Although investment sentiment has improved over the last few trading days, it's important to recall that the major stock market indices continue to trade below their critical 200-day moving averages. Overall, I remain cautious about the sustainability of any rally.

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