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Chinese Infrastructure Buildout Continues

09/23/09 09:43:11 AM
by Donald W. Pendergast, Jr.

Periodically ranking a diverse group of global exchange traded funds can help improve your investing/trading performance, even as it helps you pinpoint those nations/regions that may show promise for long-term economic growth.

Security:   JJC, KOL, DBB, FXI
Position:   Accumulate

Emerging markets remain red hot, and few, if any, are as hot as China right now. In this article, we'll learn which of a diverse basket of stock, commodity, and sector exchange traded funds (ETFs) are currently outperforming, and how analyzing the top 10 ETFs/exchange traded notes (ETNs) ranking list can shed insight onto the projected long-term economic growth trends in certain parts of the globe.

FIGURE 1: ETFS. Who needs college, anyway? You could learn plenty about global economic trends just by studying the performance relationships between diverse groups of ETFs and ETNs.
Graphic provided by: MetaStock.
Graphic provided by: MetaStock Explorer.
 
Figure 1 is the current top 10 ranking of the 50 ETFs that I track with MetaStock's Explorer feature. Not surprisingly, the top three slots are held by China-centric ETFs; all three are very strong, but HAO and TAO (which focus on China's small-cap and real estate-related equities, respectively) are outperforming the FXI (the major large cap index in China, similar to the Dow Jones Industrial Average in some respects) by a margin of nearly 2 to 1 across all time frames. Just below the Chinese ETFs come the coal and copper ETFs (KOL and JJC), followed by the Vanguard emerging markets ETF (VWO) and the iShares Canada ETF (EWC). Bringing up the remainder of the list is the iShares Semiconductor ETF (IGW) and then a couple more commodity-based ETFs -- the Powershares Base Metals ETF (DBB)and the Market Vectors Gold Miners ETF, (GDX).

Mind you, this isn't going to replace any discussions on global economics at the University of Chicago, but isn't it amazing how closely correlated all of these top 10 ETFs actually are? The linkages are obvious in some cases; a prosperous Chinese economy (or at least the hope of it continuing onward) is clearly manifested in the strong performances of its key stock indexes: HAO, TAO, and FXI. Another linkage exists in the persistently strong performances of the stocks of companies involved with supplying China with the vast amounts of raw materials needed to sustain its remarkable long-term growth trend. Examples of this would include the stocks of the component coal mining companies that make up KOL and also those within the Canadian ETF, EWC.

Canada is a major exporter of base metals, lumber, and other key commodities to China, and the tremendous rise in the stocks making up EWC certainly reflects this reality. The Vanguard ETF, VWO, also confirms the strength of emerging markets, of which China is the largest of all. Meanwhile, JJC is a direct ETN play on the copper futures market, and China is voraciously consuming record amounts of copper every day as the renovation of its antiquated infrastructure continues at a rapid pace. It has been said that if every Chinese home were instantly converted to one with Western-style copper fixtures, the entire existing above-ground supply of copper would need to be deployed into such a massive project, so it's not hard to understand why copper has rebounded so sharply from its bear market lows of 2008, given the reality of the long-term Chinese copper demand situation.

Finally, note the strength of the semiconductor (IGW) and gold mining companies (GDX); here again, we can make a convincing case for Chinese demand -- the rate of new computer, cell phone, mp3 player, and other high-tech purchases in China far surpasses the internal growth rates of similar products in virtually every other country, and all of those purchases depend on high-quality microprocessors -- and lots of them. As for gold mining stocks, consider how "pro gold" the average Chinese citizen is and that the Chinese government has blessed the marketing of new gold and silver coins and investment vehicles to a metal-hungry Chinese populace, and you can see that the fortunes of those in the gold mining business could remain very, very bright for many years to come. So it boils down to this: 50 ETFs, a top 10 list, and one important geopolitical/economic lesson on emerging markets.

FIGURE 2: HAO, WEEKLY. No trend lasts forever; by studying the expansion and retraction of the spreads between various groups of exponential moving averages (EMAs), you may be able to get a sense of what the market's next move might be.
Graphic provided by: MetaStock.
Graphic provided by: WB Detrend RT EOD from ProfitTrader.
 
Claymore TR 2 China Small Cap Index ETF (HAO) (Figure 2) has had an amazing run, but new entrants into the Chinese small-cap market might want to wait for some correction/consolidation before deciding to jump in. And here's the reason why: the MetaStock Darryl Guppy MMA template shows us that the rate of ascent of the longer-term moving averages in the series (the red lines are set at 30, 35, 40, 45, 50, and 60 [all exponential], while the blue lines are set at 3, 5, 8, 10, 12, and 15, also exponential) are starting to flatten out both in terms of the absolute spread between the averages and in the angle of attack (rate of rise) of the entire series itself.

In addition, note how the first rally was the strongest, after which the next rally could barely muster a third of the power of its predecessor. The latest rally may actually be nothing more than the start of a pronounced period of consolidation and/or correction, and the progressively lower amplitudes of the detrend oscillator (bottom of the chart) may also be implying the same thing. Finally, at the top of the chart, the last hope of a continued weekly rally resides within the Aroon (14) oscillator -- it's currently bullish (above 70), but it has started to turn down. A drop below 50 means we've confirmed that the consolidation/corrective phase has already begun.

Long term, every trader/investor should have at least a few Chinese/emerging market positions in the market, but right now may not be the best risk-reward window in which to add to one's positions. Better buying opportunities may present themselves after a period of consolidation and/or correction.



Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address: lineartradingsys@gmail.com

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