Skot Kortje has been analyzing stock market trends for 15-years using trend analysis. His Stock Trends indicators have been published by The Globe and Mail since 1995.
The Stock: Claymore BRIC ETF
Recent price: $27.36
Trend: The tremendous rally in commodity and emerging stocks is being reined in, and a market correction - long anticipated - may be upon us. Emerging stocks have benefited from the loose monetary policy pumping liquidity back into assets after the financial meltdown that sent global markets tumbling in 2008. The iShares MSCI Emerging Markets ETF , the most actively traded emerging markets fund, gained 139 per cent from its low in the throes of the market collapse to its most recent high two weeks ago. However, investors looking to lock in some of those impressive gains should consider paring down their exposure to this asset class.
Last week's market slip affected the broad stock market, but some emerging market funds have dropped below trend line support, a technical marker that alerts us to heightened downside risk. Among the exchange-traded funds focused on emerging markets, Latin American and BRIC (Brazil, Russia, India, and China), fund prices have notably dipped low enough to be categorized as Stock Trends Weak Bullish, the earliest signal of a bullish trend violation. Although this recent price weakness may be an opportunity to add to positions, the change in trend character should incline investors to consider selling.
The Trade: The Claymore BRIC ETF tracks the performance of the Bank of New York Mellon BRIC Select ADR Index. Trading in Canadian dollars on the Toronto Stock Exchange, the fund hedges its exposure to the U.S. dollar-denominated index. As such, weakness in the markets represented in its holdings, as well as a revival of sorts in the greenback gives the fund especially slippery traction. As the Canadian dollar has retreated in recent weeks the Claymore BRIC has stumbled - its relative price performance dropping in the past month.
Like many emerging market ETFs and stocks, the Claymore BRIC ETF has been Stock Trends Bullish since May, advancing from $23 to above $31 - a level it regained just two weeks ago after advancing off trend-line support. However, the fund dipped to a low of $26.50 last week, below its 13-week moving average trend line and below its low when markets briefly retreated in late October. Now Stock Trends Weak Bullish, the Claymore BRIC ETF lacks the trend-line support it had in the autumn and is less likely to rally from this level. Fund holders have good reason to acknowledge this risk by selling.
The purpose of trend analysis on the sell side is to reduce downside risk. The promise of trend trading is that the market will guide a trade, and that the prevailing trend can offer support along the way. Once that trend line support fails, the premise of a trade is violated. Risk of further loss heightens. This is not to say that the investment will not revive - it may for any number of fundamental reasons. However, investors cannot count on market demand to buttress price weakness once a bullish trend has diminished and price support levels collapse. Although the Claymore BRIC ETF did not drop below the primary trend line (the 40-week moving average) last week, investors will likely be disappointed with the fund's performance over the next period.
Every stock profile featured in this column directs a trade based on basic trend characteristics. Also advised is some measure of downside protection. For stocks that are suggested as buys that generally means a stop loss trigger at selected price points. For a suggested sell, the opportunity cost of an abandoned trade is implicit. If the stock rebounds it just plain hurts, regardless of the risk avoided.