The Contrarian Wisdom of the Herd

07/14/2010

We told you last week about the “black cross,” and the danger that this technical signal poses for stocks going forward. Recall that a black cross occurs when the 50-day moving average (blue line) falls below the 200-day moving average (red line) (see chart below). This usually bearish signal occurred last week, and most market observers -- myself included -- were expecting a turn for the worse in stocks.

Boy, were we wrong.

Rather than a turn for the worse, stocks made a scintillating move higher, with equities reclaiming that 50-day moving average. The upside in stocks immediately following the black cross shows that there is indeed wisdom in the herd.

You see, I am not the only one who talked about the black cross last week. In fact, the financial media was saturated with stories about this technical indicator, and I think the fact that so many “experts” felt so bearish can be read as a contrarian indicator. It certainly played out that way over the last several trading sessions.

Now, in keeping with the contrary wisdom of the herd, I think the pendulum from bear to bull really has swung too rapidly in the bull’s direction. Sure, we’ve had some good earnings news this week, and the rebound in stocks is nice to see. However, I think the recent move off of the July lows was a bit too spastic.

I actually think we could be in for another big move lower and, as such, I caution you to keep your powder dry and to hang onto a sizeable cash position. Remember that one week of heavy buying does not mean the bear is out of the woods. Until we see stocks move decisively above both the 50-day and 200-day moving averages, I am going to proceed with extreme caution.

The Lemony Taste of Mutual Funds

It’s summer, and the weather is heating up all across America. To cool off, many people will pour themselves a tall glass of ice-cold lemonade. Hey, I think it’s fine if your lemons get squeezed into lemonade, but what isn’t fine is if you have lemons in your investment portfolio.

The lemons I’m talking about here are underperforming mutual funds -- funds that have earned a spot on the infamous Mutual Fund Lemon List, the list of the worst-performing mutual funds. To be classified as a lemon, the fund must pass strict screening criteria: it must underperform its peer group average for the last 12 months, as well as for the last three- and five-year periods.

Here’s a list of this quarter’s 10 sourest offenders, ranked by assets.

This quarter’s Lemon List includes 1,584 mutual funds totaling $715 billion in assets, and if one of the funds you own is on the list, you need to squeeze that lemon from your holdings.

To see the latest edition of the Lemon List, and to get your FREE update each quarter, just go to the Mutual Fund Lemon List website today.

Hey, all you have to lose is that sour taste in your portfolio.

ETF Talk: Resilient Malaysia Outperforms Bigger Markets

While equities have been retreating in much of the world, there are markets in Asia that have fared well so far in 2010. Not only have I noticed the trend, but I have my eye on several country-specific exchange-traded funds (ETFs) in that region. This ETF Talk begins a three-part series that will focus on one of those Asian funds each week in the Making Money Alert.

An ETF that you may want to watch and possibly add to your portfolio is the iShares MSCI Malaysia Index (EWM). Launched in 1996, EWM has one of the longest histories of any ETF. EWM seeks investment results that correspond to the price and yield performance of publicly traded securities in the Malaysian market, as measured by the MSCI Malaysia Index.

This fund normally invests at least 95% of assets in the securities of the underlying index and in American depository receipts (ADRs), based on the securities in the underlying index. The index consists of stocks traded primarily on the Kuala Lumpur Stock Exchange. The fund rose a respectable 5.93% during the first half of 2010 from the opening of trading on Jan. 4 until the end of the second quarter on June 30. That compares quite favorably to a 6.30% drop in the Dow Jones Industrial Average during the same period.

Past performance is not a guarantee of future returns, but it does show that the Malaysian market has been more resilient than the U.S. stock market so far this year. Here are two reasons why the Malaysian market may be able to weather the financial storms better than more established markets in the United States and Europe. First, the Kuala Lumpur Stock Exchange was buoyed by Malaysian government stimulus packages in November 2008 and March 2009. Those government funds helped to keep the nation’s economy from shrinking as much as otherwise would have been the case. Second, the country’s economy was expected to grow at 2-3% in 2010 but now is projected to expand at a pace of 5.6% in 2010 and 5.8% in 2011. Amid rising concerns among investors about a possible double-dip recession, such economic growth projections are pretty impressive.

Of course, the Malaysian government’s spending has sent the nation’s budget deficit higher. But the situation is not as bad as what’s occurring in Portugal, Greece and Spain, or even larger Asian markets. For example, the national debt in Malaysia equals about 42% of GDP, compared with 187% in Japan or 110% in India. With 95% of government debt financed domestically, Malaysia’s fiscal position is much better than many other countries in Asia -- and in many other regions around the world.

Malaysia is not among the four original “Asian Tigers” -- Hong Kong, Singapore, South Korea and Taiwan -- but it is part of the next wave of countries in the region that seemed destined for strong economic growth. The country has developed into the world’s largest Islamic banking and financial center. It has a population of 27 million, a bit bigger than Texas, and the nation is Southeast Asia’s second-wealthiest country with a per capita gross domestic product (GDP) of $8,209. Among other Southeast Asian countries, it ranks behind the per capita GDPs of $37,597 in neighboring Singapore and $30,863 in Hong Kong, but ahead of Indonesia’s $2,246.

As a relatively nascent independent country, Malaysia lacks a well-established free-market economy and still uses five-year government plans to plot economic growth. The current plan is aimed at shifting toward high-value economic activities, as well as improving the manufacturing sector. With a boost from Japan, Malaysian exports from heavy industries previously became a key part of its economic growth. Malaysia is a large exporter of electrical goods and appliances, as well as one of the world’s largest manufacturers of computer hard disks.

The iShares MSCI Malaysia Index (EWM) has assets of $643 million, with about 32% of those assets concentrated in financials, 19% in industrials and roughly 15% in consumer staples. As one of the top stock markets in the world during the first half of 2010, Malaysia is worth considering as a place to invest a small portion of your holdings.

To obtain my latest ETF advice and my stop prices for each recommendation, I encourage you to subscribe to my ETF Trader service. As always, I am pleased to answer any of your questions about ETFs, so do not hesitate to email me by clicking here. You may see your question answered in a future ETF Talk.

Fabian Teleseminar: Mid-Year Review and Market Outlook 7/14/2010

Last Saturday, we held a FREE teleseminar covering the rapidly changing 2010 financial markets. The teleseminar, titled “Mid-Year Review and Market Outlook,” dealt with how you should position your portfolio for what promises to be a tumultuous second half of 2010.

As you’ve likely noticed, things are very volatile in the stock market. We saw stocks fall below their long-term moving average in May, an event that hasn’t happened since January 2008. The major indices now are firmly in negative territory for the year, but last week’s buying has brought the bulls out of their pen.

So, what’s next? Find out by listening to an audio replay of this FREE teleseminar.

During this one-hour event, we covered:

•    The financial markets in the first half of 2010. What’s worked, and what hasn’t.
•    How to read the price trends in the markets, and what they’re telling us.
•    What investment themes I believe represent the best opportunities in the second half of 2010.
•    A glimpse of my ETF watch list for the rest of the year.
•    Most importantly -- how to evaluate your current investment positions so that you don’t get hurt again.

To listen to your FREE replay of this informative teleseminar, just point your mouse here.

NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.

Radio Show Update: A Phoenix Rises from the Ashes

Hello Phoenix, we’re back! Beginning this Saturday, 10 a.m. Pacific, we are back live on the air in the Phoenix area. The show will be broadcast on KFNN 1510, Arizona’s premier financial radio network. After a long absence from the Phoenix market, it’s nice to be back in the sun. For those of you in the Phoenix listening area, please join us this Saturday for our return to your local airwaves.

In last week’s radio show, we talked about mutual funds vs. ETFs, and which was the better option for your portfolio. This week, we’ll dig into the issue further, and we’ll reveal highlights from the Fabian Lemon List -- the list of the worst-performing mutual funds.

Remember that if you missed last week’s show, or any of our shows, don’t worry. As an Alert reader, you have FREE access to my Radio Show archive, and all you have to do is go to the website and listen for yourself, whenever you have time.

To listen to the show live each Saturday morning from 10 a.m.-11 a.m. Pacific Time, just go to our website.

The State vs. the Individual

“The more the state plans, the more difficult planning becomes for the individual.”

--Friedrich von Hayek

The brilliant economist reminds us all of the consequences of action taken by the state. One of those consequences is that with increasing state regulations, taxes, etc., comes the loss of individual freedom and the ability to plan your life the way you see fit. Hayek’s free-market views are more relevant today than they’ve been in quite some time, and you can attribute that to the current backlash toward all things involving government.

Sincerely,

Doug Fabian

P.S. It’s not too early to start making plans to join me at the MoneyShow in San Francisco, August 19-21. This year’s event will be held at The Marriott Marquis and will feature 50 of the world’s smartest investors, traders and analysts. To join me in San Francisco, you can register FREE of charge by calling 800/970-4355 and mentioning priority code 018509 or by visiting the MoneyShow’s website at The MoneyShow San Francisco!

P.P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.