Sentiment in financial markets shifted to the positive as global stocks hit a one-month high today and the euro briefly hit a two-week peak. The S&P 500 index turned positive for the year and closed above its 200-day moving average yesterday for the first time in a month. The MSCI Emerging Markets Index now is just a hairsbreadth below this critical level.
Of course, it is too early to tell whether the current rebound has legs — or whether it’s yet another example of the frustrating whipsaws that we have been experiencing in the market during the past six months.
On the one hand, much of the smart money in the world is now betting on a double-dip recession, pointing to sharply deteriorating economic fundamentals in May. But others expect a strong technical rally, the beginnings of which we are seeing now.
My own view? We are never more than two negative headlines away from a sharp drop in the market. Therefore, it’s best to hedge your bets against sharp downturns.
Your current positions in your Global Stock Investor portfolio are mostly defensive — with your bet against the euro through the UltraShort Euro ProShares (EUO), as well as new bets on the U.S. dollar through PowerShares DB US Dollar Index Bullish (UUP) and the Japanese yen through the Currency Shares Japanese Yen Trust (FXY).
That said, as a result of improved market sentiment, a number of your stocks on the Global Stock Investor watch list have rallied sharply in the past week or so. The challenge, of course, is to separate the “signal” from the “noise.” As a rule of thumb, I look at a position’s 50-day moving average. If a position penetrates its 50-day moving average, I will recommend that you re-enter the position. Otherwise, it’s better to stay on the sidelines. Based on this rule of thumb, I am recommending that you re-enter your positions in the Market Vectors Indonesia ETF (IDX) and the Market Vectors Brazil Small-Cap ETF (BRF). Place your stops at $61.00 and $38.00, respectively.
Both of these ETFs represent markets that are among the favorites of global investors. Indonesia is working hard to be the next “I” in the “BRIC” acronym of leading global economies. And Brazil has just recorded an eye-popping 9% growth rate for Q1. As it happens, both of these positions — along with your holding in the iShares MSCI Malaysia Index (EWM) — are trading above their 200-day moving averages as well. By this measure, all three are among the “best of the best” in otherwise shaky global stock markets.
The WisdomTree Dreyfus Chinese Yuan Fund (CYB) continues to act strangely and out of whack with the yuan’s underlying value. Although the pressure on the yuan is all on the upside, this remains a HOLD.
iShares MSCI Malaysia Index (EWM) rose 3.77% as global markets rallied, and is now trading in positive territory for the first time. As one of the strongest relative performers among emerging markets in 2010, EWM is upgraded to a BUY.
UltraShort Euro ProShares (EUO) dropped 6.6% during the past week as the euro rallied back over the $1.23 level. The current pullback is probably a good time to add to your position. Your bet against the euro remains a BUY. Raise your stop to $23.40 to protect your gains.
CurrencyShares Japanese Yen Trust (FXY) was flat this week, as investors’ focus shifted toward rallying global stocks. FXY remains a defensive BUY.
PowerShares DB US Dollar Index Bullish (UUP) dropped back slightly as the euro and other major currencies strengthened against the U.S. dollar. King dollar remains a defensive BUY.