Emerging Markets Investing

May 23, 2012

Index Universe has an article pointing out that simply buying a large, cap-weighted index might not be the way to go in emerging markets.  For one thing, China, Brazil, South Korea, Taiwan are 60% of the fund.  The article discusses potential problems in some of the BRIC markets, and then proceeds to pick out a bunch of promising countries like Poland, Turkey, and Indonesia.

Personally, I suspect that buying a large cap-weighted index and then hoping for the best was never a very viable strategy.  Perhaps it happened to work out over certain time periods, but things change and different economies can have really different stock market performance.  And I have to say that I don’t have a lot of confidence in analyst’s guesses either, although I’m sure they know a lot more about the fundamentals of overseas economies than I do.

Here’s a thought: let relative strength sort out where you should be investing.  For example, here’s the current country breakdown for the DWA Emerging Markets Technical Leaders Index, as seen through the holdings of PIE, the Powershares ETF based on the index:

Source: Powershares (data as of 3/31/2012)

Malaysia, Mexico, and Indonesia are the largest weights right now—and those weights are based entirely on the objective performance of the underlying stocks in the market, not on someone’s opinion about what market will be good.  When performance changes, the weights will change, often substantially.  As an investor, you don’t have to contemplate whether or when the Czech Republic might outperform India.  The weights change quarterly without you having to worry about it.

Relative strength is a different, and dynamic, way of investing globally.

See www.powershares.com for more information about PDP, PIE and PIZ.  Past performance is no guarantee of future returns.  A list of all holdings for the trailing 12 months is available upon request.

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High RS Diffusion Index

May 23, 2012

The chart below measures the percentage of high relative strength stocks that are trading above their 50-day moving average (universe of mid and large cap stocks.)  As of 5/22/12.

The 10-day moving average of this indicator is 35% and the one-day reading is 30%.  This indicator reached a recent low of 15% on 5/18/12.  Dips in this indicator have often provided good opportunities to add to relative strength strategies.

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