'Overbought ETF' Designation Is Frequently Over-Employed

Who doesn’t appreciate the hard work and research that comes from the Bespoke Group? The data that Bespoke compiles always stimulates my brain cells… even when I disagree with the interpretation of the info presented.

For instance, last month I called out Bespoke for a simplistic observation that China had gone from first place to last place of the 4 BRIC nations on year-to-date performance through 9/30/2009. I wrote:

Now… mainstream media may not be expected to distinguish between an arbitrary period like 1/1-9/30, but Bespoke sure can. Wouldn’t it be more useful to look at rolling returns? Longer time periods? Why not 18 months? Perhaps we could go for 27?

Indeed, when investors looked beyond arbitrary time periods like partial calendar year returns, China was far exceeding Russia, India and/or Brazil. (Note: You can review “Why China Is Still The Best BRIC In The Wall.”)

On Friday, the Bespoke Group served up intriguing data on ETFs that are furthest above and furthest below short-term, 50-day trendlines. The information itself is meaningful, yet Bespoke deemed the “furthest above” ETFs as overbought.

The problem here is that Bespoke is solely using the 50-Day MA without confirmation from the relative strength index, the stochastic oscillator or money flow indications. Declaring something overbought because it’s further above a particular trendline than peers… even ignoring the more venerable 200-day MA… is a bit quick on the draw.

So if the “overbought” terminology is overused, how should we feel about some of the more prominent ETFs on Bespoke’s list? Are Brazil (EWZ), Gold (GLD) and China (GXC) about to hit a wave of selling?

With respect to China (GXC), one might note that this exchange-traded fund corrected -10% in the 2 months from 8/03/09-10/02/09. This occurred even as the broader emerging markets like Vanguard Emerging Markets (VWO) and the U.S. S&P 500 SPDR Trust (SPY) were gaining ground. This is also the reason that China went from first of the BRIC nations to last of the BRIC in the calendar year race mentioned above.

Now, however, China (GXC) has been pushing new highs, while SPY and VWO are still in the process of recovering from respective corrections.

For me, at least, it’s not surprising that China would lead the way forward. The only surprise is the quickness by which many choose to use the word, “overbought.”

Maybe Chinese equities are overbought. Maybe enthusiasm for Brazil (EWZ) and Gold (GLD) is overdone. Yet from my vantage point, the dollar-funded carry trade will continue to send capital flowing into emerging markets, commodities and inflation hedges in the intermediate-term… “overbought” or not.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[surfgeezer:]

Good comments on the danger of looking at short time lines or trend lines. I received notice of this article about one of my positions, EWZ. Speaking for myself, not a trader but investor, there are problems in not considering currency change or dividends. As investor I bought EWZ for both it's +6% dividend (and I look at that since that is the dividend I receive rather than yield from current price) and I believed comparable strength of Real to Dollar (+35% now ). China of course will have no change relative to dollar and gold no dividend.

Nov 09 07:45 PM