Judging by the market action over the last two weeks, you might get the idea that all is right in the world and that the markets are “off to the races” for a traditional Q4 rally. Since testing the all-mighty, 1,100 support level yet again, the S&P 500 Index has rallied for two straight weeks. The S&P 500 rocketed 3.1% last Monday, smashing through its 50-day moving average.
News about the European banking crisis continued to buffet the markets. Investors, however, remained surprisingly sanguine. The bigger news has been third quarter earnings reports, with several U.S. companies reporting surprisingly positive quarters. That’s led many investors to believe that things may not be as bad as they initially thought.
Equally importantly, markets have calmed down since the remarkable volatility of the last few months. The S&P Volatility Index (VIX) or “fear index” — closed below its 50-day moving average for the first time since late July. Throw in the fact that the S&P 500 closed above its 50-day moving average for the first time since late July, and there are signs of good things to come.
That said, it’s hard to escape feeling that the market has moved too much, too fast. Throw in the fact that the S&P 500 has stalled yet again near the 1,225 resistance level and that Moody’s downgraded Spanish debt with threats to do the same with France, and you can argue why the market is due for a healthy pullback. Global markets are still locked in the same trading range they’ve been in since the sell-off in August, and could easily trade back down to the 1,120 level.
Your positions in the Alpha Investor Letter portfolio remained nearly flat last week. Both WisdomTree Japan SmallCap Dividend Fund (DFJ) and Las Vegas Sands Corp. (LVS) moved less than 1%. Your newest addition, ProShares UltraShort FTSE China 25 (FXP), fell and now is testing support at the 50-day moving average.
This week, I am recommending that you re-enter two of your positions on your Watch List, the MSCI South Korea Index (EWY) and the MSCI Malaysia Index (EWM), as both recently traded up through their 50-day moving averages. As for stop prices, use $44.00 for EWY and $11.50 for EWM. You should feel comfortable in gradually increasing your positions here as the fourth quarter is also when emerging markets tend to perform their best.
Portfolio Update
WisdomTree Japan SmallCap Dividend Fund (DFJ) was flat for the week. DFJ looks technically strong as it trades, with both higher highs and higher lows. DFJ is a BUY.
Las Vegas Sands Corp. (LVS) rose 0.91% over the past five trading days as it flirted with its 50-day moving average. Rival Wynn Resorts reports earnings today, and analysts expect good numbers, based on continued growth in Macau. Expect some volatile movement in LVS over the next week, as traders position themselves for the Oct. 27 earnings report. LVS is currently a BUY.
ProShares UltraShort FTSE China 25 (FXP) fell 5.07% last week. From a technical standpoint, FXP’s chart is a true work of art. And the fundamental case for betting against China is growing everyday, as investors realize the unsustainability of the China Miracle. FXP is flirting with its 50-day moving average, but is currently a HOLD.
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