Bruce Powers'  Instablog

Will negative sentiment in the United Arab Emirates (UAE), Dubai and Abu Dhabi, spread to other Middle East stock markets?

Both the Dubai and Abu Dhabi stock exchanges saw another day of selling today (Wed., Dec. 9) with each index closing at the low of the range, although volume has been declining. So far, there is no sign of buyers jumping into the market. Leading companies continue to hit their daily decline limits.

Other Middle East stock markets such as Qatar, Saudi Arabia, Oman and Egypt may be starting to show signs of weakening as well.

There are four US traded ETFs that can be considered when looking at the Middle East. Be cautious though as they all have very low volume and therefore execution risk and potential volatility is high:

SPDR S&P Emerging Middle East and Africa (GAF)

Exposure: 62.6% South Africa, 25% Israel, 6% Morocco

WisdomTree Middle East Dividend Fund (GULF)

Exposure: 34% Qatar, 17.7% Egypt, 15.9% United Arab Emirates, 15.5% Kuwait

Market Vectors Gulf States ETF (MES)

Exposure: 47.7% Kuwait, 25.5% United Arab Emirates, 18% Qatar

PowerShares MENA Frontier Markets (PMNA)

Exposure: 23.7% United Arab Emirates; 20.3% Egypt; 19.1% Kuwait; 13.8% Jordan

 

Disclosure: No Positions

As of Friday’s closing price of $91.85, the Rydex CurrencyShares Australian Dollar Trust ETF (FXA) has rallied 52 per cent from its low hit in October 2008, and had retraced 95 per cent of the large down trend started at the July 2008 peak and is now at the 93 per cent retracement level. The climb from the bottoms has been steady since March 2009. 

FXA continues to show strength having signaled a continuation of the trend out of its recent retracement with a break through $91.48 and the retracement trend line on Friday. 

A move through the next minor resistance of $92.04 indicates this break should hold and continue to strengthen through the recent high of $93.41, and on to the next resistance level of $95, the high in October 2007. 

After that it’s in the area of multiple resistance areas where it will likely see some profit taking or some form of consolidation before moving higher, if it’s going to. It would be difficult for the momentum of the uptrend to continue through those high resistance levels without significant rest of some sort.
 

The breakout on Friday occurred on a gap, so it’s possible to see a bit of a throwback providing a good entry level, or a move through Friday’s high of $92.04 could be used. Volume on Friday was at the 50ADV level.

iShares Dow Jones US Energy Sector Index Fund ETF (IYE) closed at $33.45 on Friday, right at the resistance trend line of its recent retracement. IYE is now 50.6 per cent off the lows in March. 

IYE is beyond the 31.8% Fibonacci retracement level ($31.90) of the larger down trend started at the high of May 2008, which is very close to where support was found on this current retracement ($32.18). That support was also at the uptrend line and in a zone of previous horizontal resistance. Resistance has now become support after the recent rally before the retracement saw IYE clearing its bottoming consolidation area.
 

A move through $33.73, Friday’s high, also confirms a move through the down trend line and indicates a likely continuation move up to at least the recent high ($35.48), 5.2 per cent higher. The next target after that is the 50 per cent Fibonacci retracement level, which is at $37.45 (11 per cent higher).


Disclosure: no positions currently in above ETFs.

Over recent years the ETF industry has experienced rapid growth in the number and variety of ETFs available to investors. A recent report in Reuters highlights that more and more brokers and investment advisors are now offering ETFs as an alternative to hedge funds. 

Benefits

ETFs are already seen as an alternative to mutual funds and for good reason. Just some of the benefits include: 

    * highly liquid

    * broad or narrow exposure

    * can be used for hedging

    * bought and sold during market hours allowing for automated order execution

    * short selling available for many

    * can be used sector and style rotation strategies,

    * and so on 

“There are a lot more ETFs in different asset classes than there had been in the past, and they’re becoming more nuanced,” said Sean Crawford, portfolio manager of the new strategy at Barclays Wealth, which oversees $221 billion (135.4 billion pounds) for clients. “It’s become a pretty compelling investment idea.” 

Brokers are using the advantages of ETFs to help move investors from hedge funds. In a hedge fund the investor usually has some lock up period and restrictions on exiting the fund. Plus, they don’t know what their money has been invested in beyond the stated strategy of the fund. 

Many investors got “stuck” in hedge funds during the crisis as redemptions were restricted or slowed down and would prefer to have greater control over their investments. 

Industry

According to Barclays Global, worldwide assets under management (AUM) in ETFs reached a record high of $891 billion by the end of August 2009. There are 1,773 ETFs with 3,137 listings. This compares to 8,000 mutual funds with $10 trillion AUM. 

In the US, as of March 2009, there were 694 ETFs with $402.2 billion AUM, plus 139 other exchange traded products (ETPs). 

The industry is likely to continue its strong growth trend which will benefit investors up to a point. Offering new ETFs that are essentially the same as existing listings does not really add to investor’s options, it just creates more choices to sort through and potential confusion. 

Potential Investment Universe – Risk

When taking volume levels into consideration the number of ETFs as a portfolio option shrinks considerably. More than two-thirds of ETFs listed in the US have volume levels that essentially add short term risk. An ETF trading less than 250,000 average daily volume (ADV) has similar risk to any low volume stock.