A Cautious Global Bull Catches Its Breath

Nicholas Vardy

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

The story with your equity positions in the Global Bull Market Alert remained consistently positive. The MSCI Thailand Investable Market Index Fund (THD), iShares MSCI Chile Investable Mkt Idx (ECH), Itaú Unibanco Holding S.A. (ITUB), Peru’s Credicorp (BAP) and the Market Vectors Indonesia ETF (IDX) again hit either 52-week or record highs over the past five trading days. You now have double-digit percentage gains in Chile, Thailand and Colombia.

After hitting extremely bearish levels in late August, bearish sentiment has plummeted. In the latest American Association of Individual Investors (AAII) Sentiment Survey, bullish sentiment — expectations that stock prices will rise over the next six months — rose 7.0 percentage points to 50.9%. This is the highest level of optimism since August 13, 2009, near the time the U.S. market started flat-lining. Bearish sentiment — expectations that stock prices will fall over the next six months — fell 7.4 percentage points to 24.3%. This is the lowest level of pessimism since December 31, 2009.

Since falling to 20.7% on Aug. 26, bullish sentiment has rebounded by approximately 30 percentage points. At the same time, bearish sentiment has plunged by approximately 25 percentage points. These are remarkable shifts for such a short period of time.

All of this feel-good news gives cause for caution. Positive investment sentiment indicators like the AAII are often important contrary signals. The better small investors feel about the market, the more likely is a pullback. And despite world markets trading up this morning, a couple of your global holdings have pulled off record highs that they hit early last week. Some technical analysts also are pointing to the formation of an ominous “triple top” in the U.S. S&P 500. And let’s not forget that this tends to be a historically treacherous time of the year.

So while I have a number of interesting areas that I am looking at in global markets — emerging-market small-cap stocks, as well as India, which has started to outperform many global markets over the past few weeks — I am holding off on a specific recommendation this week. Note that I am, however, tightening your stops on some of your strongest performers.

Portfolio Update

Credicorp (BAP) soared to a record high of $117.30 last week, before pulling back, and finishing the week 2.23% higher. The strongest performer in one of 2010’s strongest markets, Peru’s BAP remains a BUY.

iShares MSCI Chile Investable Mkt Idx (ECH) closed the week at yet another record high of $72.80, rising 1.78%. ECH remains a BUY. Raise your stop to $67.50.

UltraShort Euro ProShares (EUO) dropped this past week, as the dollar fell toward a five-week low against the euro. Both the U.S. dollar and the euro have plenty of reasons to be weak, so I am moving this bet against the euro to a HOLD.

iShares FTSE/Xinhua China 25 Index (FXI) rose this past week as sentiment about the Chinese market improved. This is not good news for your short position here. We’ll be looking to exit this position on the next general pullback in the markets. This position is a HOLD.

Global X/InterBolsa FTSE Colombia 20 ETF (GXG) fell slightly this past week as the Colombian central bank restarted buying U.S. dollars in the currency market Wednesday to halt the ascent of the peso. Your bet on Colombia remains a BUY. Raise your stop to $37.50.

Market Vectors Indonesia ETF (IDX) hit another record high of $84.15 before dropping back slightly, and ending the week 2.57% higher. The “Next BRIC” remains a BUY. Raise your stop to $76.00.

Itaú Unibanco Holding S.A. (ITUB) hit a yearly high of $22.99 before finishing the week 4.6% higher. With the Brazilian central bank’s requirements higher than that required by Basel III, the market is recognizing that ITUB is one of the best-capitalized banks in emerging markets. ITUB is a BUY.

iShares Silver Trust (SLV) broke out of its long-term trading range, closing the week at $20.29, and 4.5% higher. “Poor man’s gold” remains a BUY. Raise your stop to $18.90.

iShares MSCI Thailand Investable Market Index Fund (THD) hit a record high of $58.76, before closing the week slightly below where it started. The fund remains cheap with a forward price/earnings (P/E) multiple of around 11 times. With Thailand’s economy expanding 9.1% in the second quarter, THD remains a BUY. Raise your stop to $53.25.

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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