If you’re one of those folks who believes in the concept of a “regression to the mean,” then you had a rationale in 2008 for why Dow 14000 would crater below Dow 10000. Similarly, you had reason to expect that stocks with P/Es above 20 would eventually work their way back to long-term averages of 16.
What you rarely heard, however, was a term to describe the opposite phenomenon. In other words, when the Dow fell to 6500… when P/Es were in the single digits by March of 2009… why weren’t the same folks talking about a “PROgression” back to the mean?
I am just wondering aloud here.
Still, I present the regression/progression paradox because so few investors have the slightest faith in Europe ETFs today. Here’s an instance where the same thinkers might redeem themselves by discussing the possibility of European Country ETFs and European Region ETFs returning to meaningful short- or long-term averages.
Recently, Bespoke pointed out that a number of regional and country ETFs had reached “oversold” status. The researchers define "oversold" as a function of trading more than one standard deviation below a 50-day moving average.
As of 2/22, the results had shown that Spain (EWP), France (EWQ), Germany (EWG), Italy (EWI) and the Netherlands (EWN) were all oversold. Moreover, they were the only oversold country ETFs – the same country ETFs that I discussed in my editorial, “Any Hope For Spain, Italy, Or Other European Country ETFs?”
Not surprisingly, with all of the oversold individual country ETFs coming from the battered region, broader European Regional ETFs were the main cluster of oversold foreign funds. In particular, the iShares Europe 350 (IEV), Vanguard Europe (VGK), the DJ Euro Stock 50 (FEZ) and the iShares MSCI European Monetary Union (EZU) collectively dominated the "oversold" spotlight.
I’ve said it before. I do believe that the "euro-dollar" will catch a break shortly; we’ll learn of Greece’s fate such that the uncertainty will subside AND attention will shift back to U.S. monetary/fiscal policy. That should help broad-based European ETFs like Vanguard Europe.
Nevertheless, I am not a buyer. For one thing, I’m not a die-hard advocate of regression/progression to the mean. Does it happen? Yes… but no one can precisely define when it will occur or on what timeline (e.g., 50-Day, 200-Day, 1-Year, 10-Year, etc.). Secondly, while I have already made a case for Italy (EWI) over Spain, and while a potential burst from Vanguard Europe is a distinct possibility, I feel better about all-world stock asset exposure in Vanguard Total World (VT). (Click to enlarge)
Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above. The company does not receive compensation from any of the fund providers covered in this feature. Moreover, the commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.