We are currently at a crossroads in the equity markets, with many conflicting opinions regarding the immediate future. There seems to be a general consensus that the US housing market is heading for a bubble burst that can cause a serious ripple effect across the entire US economy in general and equities in particular. On the other hand, a lot of international markets, led by emerging markets, show no let up in their steam.
In this backdrop, and from a retail investor's point of view, one has to carefully sift through risk/reward of various investment ideas to pick the ones that can help weather both any upcoming storm and take advantage of market upmoves.
Four Decelerating Concepts
Tom Lydon wrote an interesting summary recently of the Market Vectors Steel ETF (NYSEARCA:SLX). Steel does indeed looks attractive for the longer term, but for the short term its move could have definitely set in for a small correction. While this ongoing correction could be a good opportunity to let the overbought investors get out and let the long term investors get in, one should be patient to wait a week or two to see whether the recent year's momentum is back. If the recent Tata Steel - Corus is of any indication, things are clearly looking better in this sector, and more mergers and consolidations could follow in the near future as companies strive to achieve greater global operations.
Latin America is the next theme which has been recently been in the news on account of political events. With a lot of these countries electing socialist governments (some with anti-US and anti-Globalization leaders), and the nationalist takeover of many companies with significant international holdings, the Latam stock market could be one of the markets to stay away from. In spite of recent negative news, the iShares S&P Latam 40 (NYSEARCA:ILF) has avoided any major crash. One possible reason could be the overhanging liquidity in the global economies. Nevertheless, a prudent investor might well be careful of Latam equities.
Roger Nusbaum recently wrote an article that included Sweden as one of the countries that could weather a potential US market deterioration. While Sweden is indeed a defensive country, like most European countries it is also decently correlated with the US. Of course, correlation does not mean that the drawdown and risk/reward characteristics are the same. Nevertheless, on its own, without taking the US or Global markets into picture, iShares Sweden (NYSEARCA:EWD) has performed very well in the past year - even competing with emerging market returns. The point to consider is that Sweden is a developed country and, from a fundamental valuation point of view, it definitely looks overbought. This is another ETF that one could avoid at present.
In fact, one could argue that even emerging markets in general too have had a glorious run for the last 3-4 year. One particularly overbought and over-analyzed theme is the BRIC theme. Indeed, there is no denying that the BRIC countries are the future economic leaders. Nevertheless given the spectacular momentum it has seen, any serious market contrarion can tell that for the Claymore/BNY BRIC ETF (NYSEARCA:EEB), without at least a minor correction in the near month, this ETF is getting seriously riskier.
Four Accelerating Concepts
The Gold Miners ETF (NYSEARCA:GDX) is one of the ETFs that was recently mentioned by Gary Tanashian and has a significant breakout. There hasn't been any major fundamental news apart from minor news on individual names. But with a recovery in the commodity markets, this could be a theme to watch out.
Commodities (NYSEARCA:DBC) generally seem to be on a recovery mode. With the ever increasing demand in commodities, there could be a minor or intermediate corrections in the commodity markets, but in general commodities could be in for a major long term overhaul and its still hard to identify classic bull market tops.
The trend in commodities is probably clearer in oil (NYSEARCA:USO). While it might seems a tentative bottom has been made, given oil's volatility one needs to comment on it with some care. Looking at the current levels, one should wait and watch if oil breaks the $55 levels since it had hovered around it for quite some time earlier last year. Given the global demand and previous histories, it would not be difficult to imagine that if oil gives a clear breaks out, it could easily shoot up rapidly to $70.
The three accelerating themes thus far were commodity themes, and all the four decelerating themes were international market concepts. The last accelerating theme that I would argue in favor is the Broadband Holders (NYSE:BDH). There hasn't been news on this ETF and it has been mostly forgotten with the barrage of new ETFs that have been launched in the last 6 months. This ETF has recently formed a kind of rounding bottom and shows clear signs of strong consolidation. It could show some strong outperformance over the US broad markets.
Disclosure: Author has no position in the above-mentioned securities.