With the stock market seemingly making all-time highs on a daily
basis, investors are finding it difficult to locate good
At least that's what everyone tells me.
We all know it hasn't been much fun being an investor in the
arena this year. The strengthening global economy has put many
quantitative easing programs on hold. And the recent
tapering of monetary stimulus
by the U.S., compounded by geopolitical and financial instability
in developing nations, has led to a rapid sell-off since the year
And that's why most investors are staying away from emerging
markets like Russia and Russian ETFs. Of course, the short-term
risks are remarkably clear. But, the crisis in the Ukraine should
not cloud your judgment as an investor with a long-term
I think the famed contrarian investor David Dreman sums up my
thoughts on Russia and other emerging markets best.
"[Benjamin] Graham's observations that investors pay too
much for trendy, fashionable stocks and too little for
companies that are out-of-favor, was on the money… Why does
this profitability discrepancy persist? Because emotion favors
the premium-priced stocks. They are fashionable. They are hot.
They make great cocktail party chatter. There is an impressive
and growing body of evidence demonstrating that investors and
speculators don't necessarily learn from experience. Emotion
overrides logic time after time."
The evidence Dreman speaks of resides in studies like
investing "by the numbers" guru Mebane Faber's recent report.
Mr. Faber did the math on returns from buying asset classes
beaten down 60%, 70% and even 80%. His findings were impressive,
to say the least.
- Average three-year returns after buying a sector following
a severe crash would have rewarded an investor nicely - from
57% to an incredible 240%…with the highest returns following
the most severe beatdowns.
- Returns after buying a similarly beaten-down industry were
also huge - between 71% and 115%.
- And returns when buying an entire country after a serious
crash? A cool 107% to 156%.
So according to Faber's studies, if you are a long-term
investor there's lots of money to be made in beaten-down asset
classes like the
Investors willing to take near-term losses for the potential
for long-term gains should look towards Russian ETFs like
Market Vectors Russia ETF (
The risks are greater…but the rewards are significantly
higher. And as we have seen all too often in the past, heightened
investor fear often leads to incredible
Right now I think the market is offering us one of those
chances. Take a look at the chart below.
Notice the RSI readings below the RSX chart.
The RSI is an overbought/oversold oscillator that compares the
performance of an equity - in our case a highly liquid
- to itself over a period of time. It should not be confused with
the term "relative strength," which is the comparison of one
entity's performance to another.
The blue circles in the chart above indicate each time RSX hit
an extreme oversold reading.
After each oversold reading, RSX rallied almost immediately.
Some of the rallies - including the latest in July - lasted only
a few months. But the gains were there if you were quick enough
to take them. However, as Mr. Faber proved in his study, waiting
several years after an asset has been beaten down reaps the best
and most consistent returns.
RSI is an important tool that allows you to gauge the
probability of a reversal. It does not tell you the exact entry
or exit point, but it helps you be aware that a reversal is on
Since I'm a contrarian at heart, I prefer to buy an index when
a highly liquid stock or ETF reaches an extreme oversold
So let's explore ways to take advantage of the oversold
reading in RSX. Obviously, you could buy the Russian ETF
outright. A round lot (100 shares) would cost you roughly
Or you could sell puts. Selling puts requires far less
capital…roughly 80% less. Not only that but, you are able to
select the price in which you want to buy the stock or in this
case the ETF outright. It's my preferred way to take advantage
of extreme oversold readings.
And I've been using the same strategy successfully since last
May in my
High Yield Trader
service. But regardless of the strategy, what's truly important
here is the opportunity.
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