Over the past few years, "QEternity" is the humorous moniker
that's been used to describe the Federal Reserve's seemingly never
ending monetary stimulus. But the beginning of the end of QE
and one of the most liberal monetary experiments in human history
Central banks from emerging market countries like Brazil
(NYSEARCA:EWZ), India (NYSEARCA:INDY), Indonesia
(NYSEARCA:IDX), and Turkey (NYSEARCA:TUR) are already taking
aggressive steps to prepare for massive capital outflows ahead of
the Fed's decelerated asset purchases.
But as money flows away from emerging economies back into to
developed countries, funding future economic growth and servicing
debt becomes more difficult. Also, there's the problem of
containing inflation, which is still too high in BRIC nations
(NYSEARCA:BKF) like Brazil and India.
Emerging markets have been among the greatest beneficiaries of
the Federal Reserve's five-year easy money cycle. Essentially,
Bernanke & Co. encouraged the "risk-on" trade of owning riskier
assets by pushing investors out of low-yielding "safe"
Since December 1, 2008, emerging market equity ETFs
(NYSEARCA:VWO) have jumped around 71% compared to a 51% increase in
stocks from developed market countries (NYSEARCA:EFA) like
Australia, Canada, and Japan.
From a valuation perspective, emerging market stocks are at
their cheapest levels relative to the S&P 500 (NYSEARCA:IVV) in
five years. (See chart below.) But buyer beware. The
"cheap valuation" argument is only a good entry point for emerging
market investors who want to get stung by the value trap. Price
action is saying lower prices are ahead.
Because stock prices are always a leading indicator, we've used the
relative weakness in emerging market stocks to cash in.
In an 8/7/13 update via our
, we wrote to subscribers:
"Almost half of VWO country representation is in just three
countries: China, Brazil, and Taiwan. And all three countries
have underperformed relative to developed stocks. On June 24, VWO
hit is yearly low of $36.50 and right now technical indicators
are telling us that a retest of yearly lows is probable."
Via our intradayalert last week, we sold half our recommended
ETF position in our 8/7 report in the VWO Oct 2013 put options for
a 65% two-week gain and we're still riding the other half. Our
other position in EUM, which aims for 100% opposite daily
performance to emerging market stocks was sold for a small profit
Profit Strategy Newsletter
uses a combination of market sentiment, fundamental/technical
analysis and common sense to be on the right side of the market.
Since the beginning of the year, 78% of our time stamped ETF picks
have turned a profit. (through 6/30/13)
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