Global stocks are trading down again today, after Germany announced a ban on short selling in its stock market. The S&P 500 briefly pierced its 200-day moving average, a crucial support level in the view of many investors. A close today below that level could trigger more selling. More ominously, the MSCI Emerging Markets Index closed under its 200-day moving average for the second time in the past month. The significance of the first time was hard to gauge, as oil followed the “flash crash” of May 6, which distorted all technical measures. But the second penetration has definitely made me more cautious.
Global stock markets have been exceptionally volatile over the past few weeks. The challenge, as always, is to separate the signal from the noise. And it has gotten very noisy out there. The market’s worrisome tone is a disconnect from the underlying positive global economic news. The International Monetary Fund (IMF) recently revised projected global growth rates for 2010 to 4.5%. And, that’s just the latest in a series of revisions. The IMF even confirmed its eurozone GDP growth forecasts of +1.0% and +1.5% for 2010 and 2011, respectively, saying that risks to the growth outlook appear "broadly balanced."
Your bet against the euro through the UltraShort Euro ProShares (EUO) hit a record high of $25.25 yesterday, shooting up 7.63% since its close last Tuesday. The effect of the “shock-and-awe” bailout faded more quickly than analysts had hoped. Europe’s fundamentals remain weak — its economy grew at an anemic 0.5% in Q1 — and its fiscal challenges are daunting. The most worrisome thing about the bet against the euro is the degree of consensus among investors. Contrarians would point out that too many traders are now on one side of the trade. But with the euro’s trend still firmly down, EUO remains a BUY. Raise your stop to $23.00.
Last month’s pick — the iShares MSCI Malaysia Index (EWM) — is holding up relatively well and was only slightly off during the past week.
The fundamentals of your positions on the watch list haven’t changed. I continue to be particularly bullish on the iShares MSCI South Korea Index Fund (EWY), Market Vectors Indonesia ETF (IDX) and iShares MSCI Israel Cap Invest Mkt Index (EIS). But with the market’s mood so unsteady, I am holding off on recommending any of these positions.
The WisdomTree Dreyfus Chinese Yuan Fund (CYB) barely moved in the past week. Indeed, it retreated just 0.15%. The case for owning CYB remains intact and it stays a BUY.
iShares MSCI Malaysia Index (EWM) dipped a modest 2.26% during the past week. EWM is a BUY.
UltraShort Euro ProShares (EUO) notched gains during the past week that more than doubled the slight declines in your other two investments in the portfolio. As I mentioned, your bet against the euro remains a BUY. To protect your gains, be sure to raise your stop to $23.00.