Making Money Alert: Is it a Breakout or a Fake Out?

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

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There’s been a whole lot of shaking going on in the equity markets through the first half of July. Stocks began the month with a concerted sell-off. But during the past several trading sessions, we’ve seen the return of buyers to the market. A choppy, range-bound market isn’t surprising this time of year, as we usually see a decrease in volume that’s accompanied by sizable price swings during the summer months.

I think we’ll soon know if the rally we’ve witnessed since last Friday is for real. Technically speaking, the index is in a bullish pattern, above both its short-term, 50-day moving average, as well as its long-term, 200-day moving average. The chart below of the broad measure of the domestic market tells us where we stand with respect to its moving averages.

The bearish case here for stocks is that the index also is sporting a pattern of recent highs that remain well below the multi-year high we hit in April. If stocks fail to make their way through the overhead resistance that remains in the market, we likely are in for more range-bound action. Also, if the index were to break below its most-recent low around the 1,325 level, we would slip beneath short-term resistance. Such an event clearly would show a bearish technical pattern.

As the old adage goes, only time will tell which way this market will trend next. With that situation the case, I am going to elicit the help of another old adage when it comes to how to invest in this market. And, that adage is better safe than sorry.

All Quiet on the Euro Front — for Now

It has been a case of all quiet on the European front for the past week or so, but that’s not likely to last much longer. Greece is set to run out of money sometime during August, and that nation’s dismal fiscal situation is going to set the stage for another showdown with German leaders for more bailout funds.

We’re also likely to get another flare up from the Spanish banks, as their respective fiscal problems have yet to be resolved. The country’s bond yields are back above 7% this morning, and that reality spells big trouble for the Spaniards, and for the European Union.

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A quick glance at the chart of the iShares Spain ETF (EWP) above shows us that the upside momentum in the sector has given way to sellers. How low can Spain go? The answer is a lot lower, potentially, and that drop can drag down stocks in Europe, Asia and the United States.

ETF Talk: Economic Trouble in China Spurs Investment Opportunities

The once-flourishing Chinese economy is showing declining growth in 2012. A global economic growth leader, China’s average 10% Gross Domestic Product (GDP) gain during the last 33 years is now projected to reach only about 8% this year. The Chinese government recently dropped interest rates twice, causing me to start paying attention to the Market Vectors Renminbi Bond ETF (CHLC).

The exchange-traded fund (ETF) seeks to perform parallel to the Market Vectors Renminbi Bond Index, which invests its assets in fixed-rate Chinese Renminbi-denominated bonds issued by Chinese and non-Chinese corporate, government, quasi-government or supranational issuers. Those bonds specifically are available to investors outside of mainland China. As of today, the year-to-date return was 1.90%, holding an average coupon of 2.11%. However, the fund exposes investors to potential counterparty risks and the quality of collateral that some banks use to hold investors’ funds, so CHLC is not without risk.

The fund offers some diversification, since the top three countries that it invests in and the percentage of the portfolio in each are: China, 48.89%; the United States, 13.74%; and Germany, 10.32%. As of July 18, the fund’s top ten holdings were BSH Bosch und Siemens Hausgerate GmbH, 12.03%; HKCG Finance Ltd, 11.31%; Caterpillar Financial Services Corp., 10.03%; Volkswagen International Finance NV, 7.89%; Export-Import Bank of China, 6.82%; China Development Bank Corp., 6.37%; China Power International Development L, 6.57%; Bank of Communications Co Ltd/Hong Kong, 3.99%; China Government Bond, 3.97%; and Caterpillar Financial Services Corp., 3.96%. All of the holdings earned an S&P bond rating of ‘A’ or better and total more than half of the fund’s strong $5.09 million in net assets.

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Even among similar ETFs, CHLC remains attractive. First, the fund’s fees are relatively inexpensive, with a lower-than-average operating expense of 0.35%. Also, CHLC’s diversification should provide stability, even if the ETF opens investors to the risks of foreign interest rate fluctuations. My hope is that as interest rates in China remain low or drop further, the Renminbi bond yields in CHLC will offer an enticing investment opportunity.

Although economic growth in China is slowing and its equity market is less inviting, the country’s declining interest rates are good for investors in CHLC. Deepened concern of an economic slowdown has led Chinese policymakers to drop interest rates to stimulate growth and to reduce the country’s growing trade surplus. Further interest rate cuts may lie ahead. As a result, savvy investors may want to consider CHLC as a way to profit from the Chinese bond market.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

BOND-ing with the Latest ETF Report

The second quarter is in the books, and that means it’s time for you to get your new Fabian ETF Report.

This quarter’s list shows details on more than 1,200 ETFs holdings with over $1.1 trillion in assets.

So far this year, there have been 95 new ETFs introduced into the market. By far the biggest of them all is the PIMCO Total Return ETF (BOND). This fund has grown to $1.7 billion in assets in just over four months!

Other notable funds in the report include the Morningstar Multi-Asset Income Fund (IYLD), which is the first multi-strategy, “fund of funds” income product. There’s also the SPDR Barclays Short Term High Yield (SJNK), a new way to play the short-term bond market. Finally, there is the MarketVectors Unconventional Oil and Gas (FRAK), the first ETF of its kind in the unconventional oil and gas extraction space.

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Click here to get your quarterly rundown on all of the 1,200-plus ETFs today, and never be left out of the ETF loop again.

The Wisdom of Covey

“In the last analysis, what we are communicates far more eloquently than anything we say or do.”

–Stephen Covey

The author of the influential and über-popular bestseller, “The Seven Habits of Highly Effective People,” helped countless businessmen, entrepreneurs and investors take the steps necessary to become more productive, and better able to navigate the challenges life throws our way. Covey passed away on Monday, but his legacy of enhancing countless lives will live on. So, Stephen Covey, I raise my glass and toast your contribution to the world.

Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my audio podcast, newsletters, seminars or anything else. Click here to ask Doug.

To the best within us,


Doug Fabian

P.S. Today’s challenging market conditions require even more knowledge than ever for investors and traders like you to keep pace with the latest market intelligence to safeguard your portfolio and to profit from opportunities that only may be available for short periods of time. Join me at this year’s MoneyShow San Francisco, August 24-26, at the San Francisco Marriott Marquis to hear recommendations and advice about how best to profit in 2012 and beyond! Register FREE today by clicking here, going to DougFabian.sanfranciscomoneyshow.com or by calling 1-800/970-4355 and mentioning priority code 027879.

 

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China has been getting a lot of bad press lately. Gross Domestic Product (GDP) growth is slowing. China's much-vaunted currency reserves have fallen for the first time in many years. Thousands of U.S. investors have gotten burned by investing in fraudulent U.S.-listed Chinese stocks. And tellingly, a growing number of China's wealthiest entrepreneurs are packing their bags, and taking their money out of China. This also means that over the coming years, you'll make more money by betting again

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