Wednesday, September 2, 2009

ALERT 09/02/09: The China Correlation

Doug Fabian's
Making Money Alert | Wednesday, September 2, 2009
In This Issue:

» NEW! Video Alert
» The China Correlation
» Seven Secrets of Success for ETF Investors
» ETF Talk: A Technology Buzz
» Roll the Bones
By: Doug Fabian | Editor, Successful Investing | President, Fabian Wealth Strategies
The China Correlation

A fight is not won by one punch or kick. Either learn to endure or hire a bodyguard.

--Bruce Lee

If we think of investing as the battle for market-beating profits, then we also can equate that battle with being in a fight. And there is perhaps no better philosopher of combat than the late, great Bruce Lee. In the quote above, Bruce reminds us that if we are going to engage in this fight, we need to be prepared to endure -- or to hire someone to do it for us. My personal constitution won't allow me to do anything but endure, and to be honest, this fight is one I love engaging in each and every day.

This week, we've seen a fight between bulls and bears, and so far, the bears have been in control. So, is this the beginning of the pullback I've been fearful of for some weeks?

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I think it's still too early to tell for certain. And even if we do get a pullback on the order of 5%-10%, that pullback is likely to elicit some bargain buyers. That buying likely would cause a snapback rally in stocks, at least in the short run.

If we take a look at the following chart of the S&P 500 Index, we see the sharp pullback that's occurred over the past week or so. However, despite this decline, stocks still are trading above their short-term, 50-day moving average (blue line), as well as their long-term, 200-day moving average (red line).

While the bears have seemed to wrestle control of the U.S. markets in recent days, one area where the bears have dominated is China. Early this year, China was the one area of the world thought to be somewhat immune from the global economic downturn. But during the past several days, there's been a huge drop in the Shanghai stock market. That market is much more volatile than the shares you and I have access to via the iShares FTSE/Xinhua China 25 (FXI).

Shanghai stocks are not available for purchase by U.S. buyers, and so their market is more susceptible to sharp declines. Still, there has been a pronounced decline in what I call the "Dow" of China, FXI. In the chart below, we can see the sharp nature of the recent sell-off in China's top 25 stocks.

The index now has dipped below its 50-day moving average, a technical breach that often spells trouble going forward. Now, because China has led the way in terms of world market performance, and because China is the world's leading economic engine, it behooves us all to keep a keen eye on this fire-breathing dragon.

If we continue to see China's stocks give back much of their value, it could be a shot that reverberates around the world.

Seven Secrets of Success for ETF Investors

I just returned home from a fantastic trip to San Francisco, where I gave several presentations to attendees of the Money Show.

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I must say that this year's show was not only well attended, but most of the attendees I spoke with were brimming with enthusiasm and optimism about the opportunities in the market going forward. The upbeat climate was very refreshing, and it was a far cry from the climate at some of the Money Shows I went to in 2008, when it seemed like everyone was scrambling to protect themselves from financial ruin.

One of the seminars I gave during the weekend was titled, "The Seven Secrets of Success for ETF Investors." Here's a quick sample of those seven secrets, taken directly from my Money Show presentation:

1) Transparency: Look Before You Buy

2) Volume Matters

3) Exposure Is Key

4) Gauge the Risk

5) Selecting the Number of Funds

6) Know When to Sell

7) Monitor Your Portfolio

I know these seven secrets require a little more elaboration, and I'm happy to do so. In fact, all you have to do to get my complete PowerPoint presentation is click here.

Finally, I'd like to take this opportunity to thank all of you who came to my presentations in San Francisco. This was one of the best Money Shows I've been to, and it's all because of you. I hope to see you all next year in the city by the Bay.

ETF Talk: A Technology Buzz

Technology has advanced enormously, compared with just ten years ago. Just consider how much people rely on cell phones and use a growing number of tech-savvy applications. Such devices now let users check their emails, monitor the market and track sports scores virtually anytime. Even once bulky consumer electronic goods, such as televisions and desktop computers, are becoming thinner and more capable than ever. Investors have taken notice and are putting a heightened amount of their personal resources into technology funds.

Fortunately, there are exchange-traded funds (ETFs) that allow investors to capture the benefit of technology's resurgence in the market. One ETF that has caught my interest is the iShares Dow Jones US Technology (IYW). This fund tracks some of the largest public companies in the United States that compose the Dow Jones U.S. Technology Index. As the table below shows, IYW holds large shares in Microsoft and Google, as well as other big technology companies.

Percent of Holdings
Microsoft Corp 11.25%
International Business Machines Corp 9.2%
Apple Inc 8.47%
Cisco Systems Inc 7.34%
Google Inc 6.43%
Intel Corp 6.21%
Hewlett-Packard Co 4.77%

The fund consists almost entirely of two categories: technology hardware and equipment, 55.54%, and software and computer services, 44.18%.The following chart shows IYW's recent upward trend. Year to date through Friday, Aug. 28, IYW is up 41.35%, beating the S&P 500's 13.95% increase and the 28.50% gain in the technology-dominated NASDAQ Composite.

The performance numbers show that technology stocks are leading the market's overall recovery.

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Indeed, large technology companies such as Microsoft, Intel, Apple and Cisco Systems could become the 21st century's market bellwethers. If you like the outlook for technology, you may want to consider investing in a fund such as IYW that is positioned to rise along with the sector.

For those of you who want specific advice about which ETFs to buy and sell, check out my ETF Trader service by clicking here. As usual, I am happy to answer any of your questions about ETFs. To send your questions to me, please click here. You may see your question answered in a future ETF Talk.

Roll the Bones

We go out in the world and take our chances
Fate is just the weight of circumstances
That's the way that lady luck dances
Why are we here?
Because we're here
Why does it happen?
Because it happens
Roll the bones

--Rush, "Roll the Bones"

Sometimes in life, you have to take a chance. Whether it's your career, your personal relationships or even just your hobbies, taking chances is often a very good thing. I believe we need the stress of the unknown in our lives to help us grow, and to give us the kind of thrills that should fill our lives. So, if the dice are hot, why not step up and take your shot?

Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to Ask Doug.
On the Radio:
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