Four ETFs Celebrating A Merry Santa Claus Rally

December 08, 2008

Global telecom ETF stages a technical breakout on strong volume. Could ETFs focused on China, Hong Kong and SPY be far behind?

 

 

Even though stock markets have rallied nine of the last 11 days, investors need to realize that all of the major indexes are still locked into a downtrend.

Let's break it down a little bit. Technical trends of the S&P 500's performance extending from October 2007—when the market peaked—now remain negative. In fact, if you look at an even-shorter-term price chart since Labor Day through Monday, most major benchmarks are still trending downward.  

Jerru SlusiewiczThe point here is that we've only seen one positive period in this current bear. That's during the past 11 days. And that's just not long enough to determine whether this mini-rally will prove to be sustainable.

But it's not all doom and gloom. Some very positive developments are taking place in broad indexes. For one, stock markets have rallied the past three Fridays on greater volume. (That's important since more volume shows institutional support for such a move upward).

If you look at the three months prior to that, traders didn't want to take long positions heading into the weekend and a new week.

We shouldn't forget, either, that stocks are rallying despite extremely dour economic news. Unemployment, manufacturing and inventory levels continue to deteriorate in alarming fashion. Consumer spending wound up buckling at an annual rate of 18% in the third quarter. Retail sales for November are due later this week and economists believe they'll show a fifth straight month of declines—which would be unprecedented.

From the market's peak to Nov. 21, the S&P 500 slid 52%. So the question is whether that's enough to discount all of the current and future bad economic news. Or, is this just a seasonal Santa Claus rally?

But this is perhaps too broad of a generalization to make when facing such uneven technical patterns as we're seeing today.

Breaking our analysis down to a sector-by-sector level, we're actually seeing more encouraging signs showing up. On Monday, we ended up wading back into the market for the first time in awhile, putting some accumulated cash into the iShares S&P Global Telecom Index (IXP). It has a yield of 5.6% and some of this portfolio's biggest names are holding up much better than the rest of the market.

To dip our feet into the sector, we decided to go more global since foreign markets have been so badly beaten up compared to U.S. stocks in this category. And this ETF is highly diversified. It holds 14% in AT&T and 11.5% in Vodafone. Another 10% of its holdings are in Telefónica and just under 8% in Verizon.

IXP's chart indicates a technical breakout on Monday. The ETF had been locked into a trading range of $40-$50 per share. Shares closed past the upper end of that range on Monday; on eight other occasions since Oct. 8, IXP had tested the $50-per-share level without staging a breakthrough.

As a result, IXP's surge on Monday suggests new leadership going forward. We've set a price target of $60 per share, which would coincide with its 200-day moving average.

Now that it has broken out, we could be seeing a new trading range forming. But depending on how the market reacts, we'd probably lean toward pulling back in IXP once it gets to the $60 range.

Some other areas we're considering, but haven't taken positions in yet, include:

 

 

1) The iShares FTSE/Xinhua China 25 Index (NYSE: FXI). It trades about 51 million shares per day. That's much more liquid than the SPDR S&P China ETF (NYSE: GXC) and the PowerShares Golden Dragon Halter USX China Portfolio (NYSE: PGJ). The SPDR only trades around 60,000 shares per day and PGJ trades around 250,000 shares per day. There's nothing wrong with either GXC or PGJ. It's just that as a portfolio manager, I'm buying for a lot of clients with large portfolios. So liquidity is a key concern in getting the best pricing. For individuals, it would be fine to go with GXC and PGJ. It's really a matter of personal taste.

Technically, FXI staged a breakout on Monday above $28 a share. That's where the ETF's price had been running up against resistance lately. Since early November, FXI hasn't been able to break that level on six different occasions.   

So why aren't we buying it yet? The problem is that its intraday low Monday was $29.58 per share. That's almost 6% above its breakout point of $28 per share. The fact that FXI closed even higher at $30.25 leaves us concerned we're chasing an ETF that may have moved too quickly. We're going to watch FXI closely over the next several days to see how it performs, and possibly open positions in China. We'd like to see the $28 pricing level hold and a clear base to form before buying FXI. In other words, we really don't want to see this ETF's price run up much more.

2) The iShares MSCI Hong Kong Index (NYSE: EWH). It has moved above its 50-day moving average of $10.60, closing at $10.75 on Monday. EWH's first resistance should come around $11.20 per share, based on previous highs in early November and late October. So if we can see a breakout, that would give us more confidence that this Hong Kong ETF is ready to assume leadership in overseas markets.

3) The SPDR S&P 500 ETF (AMEX: SPY). There's a possibility that over the last month, SPY has formed an inverted head-and-shoulders technical pattern. That would indicate an extremely bullish break to the upside. It would give us a chance at a 15% rally from here if this rebound can gain some legs. But we're not convinced yet of such a breakout. But we're very, very close. Patience at this point is a virtue. On SPY, we'd need to see a move to $94 per share. It closed at $91 on Monday.


Jerry Slusiewicz is president of Pacific Financial Planners in Newport Beach, Calif., and his columns appear regularly on IndexUniverse.com. He can be reached at:

[email protected]

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