How to Trade in 2009

by Chris Harne

Welcome back to part 2 of 'How to Trade in 2009'. After discussing some macro economic scenarios in part 1, it’s time to look at how to take advantage of those trends.

China is perhaps the best emerging market play for 2009. After dropping 60% in 2008, the market could be in for a significant bounce. This is one of the few economies actually growing and, as stated earlier, it has the potential to obtain growth away from exports. After a nice run to start 2009, the iShares FTSE/Xinhua China 25 Index, (FXI), appears to be consolidating its recent gains. The FXI broke through resistance at $28 in early December and that breakout point has served as solid support since being tested twice. This is a good place to start a position in the FXI, but it may take some time before it begins a more serious move up (click on chart to enlarge).

iShares FTSE/China 25 Index ETF

Japan is another market that could see significant gains this year. China and Japan are large trading partners given their geographic proximity, and a prosperous China would be hugely beneficial to Japan. In 2007, China overtook the US in becoming Japan’s largest export market, and trade with China had been growing at a record pace until recently. While that growth may slow somewhat, there is still a lot of potential in trade with China as consumer spending rises. Also, Japan is the only developed economy to have already gone through a massive debt unwind back in the 80’s. Their economy has already experienced and worked through the problems the US and Europe will be going through during the next few years. Combined with strong trade with China, Japan’s recession should be significantly less severe. Those interested in investing in Japan can use the iShares MSCI Japan Index, (EWJ). Technically, this is another chart showing a strong upward trend line (click to enlarge). It did hit resistance at about $9.5 a share, but put in a higher low after reversing down. Should the EWJ break through resistance, it would be a good entry point. From there, it could easily go to $11 before any other significant resistance occurs.

iShares MSCI Japan Index ETF

A way to hedge long exposure in any of these markets would be to short Russia. It’s no secret that Russia is in trouble since oil and natural gas have plummeted. They have repeatedly devalued their currency to spark exports with little success. Even if oil rebounds, prices should remain far below their highs and Russia will continue to struggle to finance itself. Also, foreign investment continues to dry up as the policies in Russia are less than friendly to investors. Technically, the chart (click to enlarge) looks uninspiring. Even as world markets have rebounded strongly, Russia has failed to make a significant move up. For those interested in shorting Russia, there's the Market Vectors Russia ETF (RSX). Two words of caution – this ETF is thinly traded and is very volatile. So make sure the size of any position is appropriate. There is resistance at $16 so stops can be set at that level.

Van Eck Russia Market ETF

Oil has declined a stunning 70% from its peak in July and has only started to rebound. The pace of the decline suggests that economic activity literally dropped off a cliff in the 3rd and 4th quarters of 2009. Oil should rebound rather strongly from this level in the intermediate term (2-3 months). Economic declines should moderate and there could be a return of a geopolitical risk premium such as the rise we have seen with the Israeli conflict. The largest Brazilian oil producer, Petrobras (PBR), will be a direct beneficiary of higher oil prices. Looking at the chart (click to enlarge), PBR has steadily gone higher since making a low on November 21st. It is in a solid uptrend with higher highs and higher lows. There is potential resistance around $30 a share. Should PBR break that resistance, it would make for a good entry point. Investors can look to add beginning positions on the break and buy dips when prudent. A close below $21 would be a negative for the stock.

Petrobas ETF: Largest Brazilian Oil Producer

One thing to consider, however, is that the world is only in the beginning stages of a deflationary unwind. Inflation, while often talked about due to the massive stimulus packages across the world, will not be an issue for 2-3 years because the velocity of money continues to decline. Therefore, oil is in a longer term bear market. PBR is a good trade to the upside in 2009, but use tight stops and don’t look at this as an investment at this point.

Perhaps a nice way to hedge a long in PBR is to short Goldfields (GFI). Goldfields is a South African gold miner that has recently run up over 100% from its bottom in November. This stock rises and falls with the price of gold. Recently, it has outperformed since it was unjustifiably beaten down with the rest of the market. But it appears to have gotten a little ahead of itself. The stock just tried to break over resistance at around $10 a share and reversed hard to the downside. That suggests buyers are exhausted and selling pressure could resume. It also fits with the deflationary theme since gold should be under pressure in that environment. With the stock trading between 9 -10, traders have a nice risk/reward to the short side with a stop over $11 a share. As with PBR, be careful to obey your stops. If the market even starts to sniff inflation, gold will climb fast and take GFI with it (click on chart to enlarge).

Gold Fields ETF: South African gold-mining company

Markets are changing rapidly so be sure to stay nimble in any foray with these investment ideas. For those that stay disciplined, 2009 offers a lot of opportunity and promise. Remove emotion from your decision making and take losses quickly. Check back for updates throughout 2009 and more trading ideas. Good luck!

Disclosure: Emerginvest is an international finance portal, providing analysis and data on 120+ world markets to help individuals find investments from around the world. The author of this article, Chris Harne, holds positions on FXI, GFI, PBR, RSX, and EWJ.

Comments

[RomanFinancial:]

Looks like these charts are done in E*Trade Pro. My favorite platform! Excellent macro analysis. This is good stuff!

Jan 12 02:57 PM

[Francorp:]

It is getting closer and closer to being a great time to buy!

Jan 12 03:50 PM

[Conan the B...:]

Francorp: Buy what? One of your Products?

No, I did not click on your website, just on your previous comments.

Jan 13 09:07 AM

[jadiree:]

Mr. G.A. Schilling says that the Housing Market will go down another 20% in 2009...I think I'll go w/ him instead of this youngin.

Jan 13 11:05 AM

[bobbobwhite:]

Mr. Harne is diligent about telling readers to watch their sell stops. And, to hedge their long positions. Both are good advice if you are buying, which is not good advice for anyone other than a trader.

And, all indications are that it will be a trader's market for quite a while.

Jan 13 12:26 PM

[Urbane Gori...:]

Well... Bad timing. FXI dropped below your $28 resistance to $25.88 today. It's sliding down a lower bollinger on the daily chart. No reason it can't slip all the way down to $20 from here. The main culprit is earning season.... Otherwise, I'd agree that it looked like it was capable of hitting $36 quickly... jegan ;-)

Jan 13 04:37 PM