The second group consists of investors who believe they can outsmart the market. They’ve stayed on the sidelines, planning to buy in and make their fortunes when the markets break down a second time. But they may never get their chance.

Both strategies are flawed. And both ignore the single strategy that investors need to employ to profit in the later stages of a recovery rally.

The first group of investors – the indexers – have a unique problem. Broad-based investments such as indices are really only favored in the early stages of any recovery rally, when there’s plenty of easy money to be made.

These investors either don’t know – or choose to ignore – the reality that long rallies tend to change character: Broad-based choices are super when the rising tide is lifting all boats early in the game. But then the game itself changes.

Early on, index investors reap the lion’s share of the market-rally profits. But as rallies mature and capital continues to flow, successful investing becomes more of a stock-picker’s game. This means that specific stocks – not the indices – become vastly higher probability bets.

There are many reasons why this shift occurs, but it really comes down to two key factors: Where the money is going, and where the money is flowing.

This means there’s plenty of fuel to keep the rally alive both here and abroad, and we’re not alone in our opinion.

Beware of the “Golden Period”

Jack Ablin, who helps oversee $60 billion as chief investment officer for Harris Private Bank (NYSE: BMO), says there is still  “an enormous stockpile of liquidity on the sidelines [and] the reinvestment of [that] cash could help fuel the market.”

Unfortunately, this is well-known to investors, which actually makes it a problem. As hedge-fund manager Kyle Bass noted: “We are today in the midst of what economists often refer to as the ‘Golden’ period, where everything feels good and the long-term effects of deficit spending and money printing have not yet been realized.”

This is something I’ve talked about time and again during investor presentations all around the world. People who are already numb from having been pummeled on the way down, have once again become intoxicated with the rally over the 12 – 18 months that such advances typically last. They see a chance to recoup all their losses and be made whole. This makes them more prone to poor timing decisions, or poor investments choices.

Another problem with long rallies like the one we’re experiencing now is that you have be “in” from the get-go or you won’t “go” at all.  Today’s algorithmic trading simply doesn’t allow for the kinds of market pullbacks and corrections we used to see as recently as 10 years ago. I know – I’ve written several of these trading programs. Today, if you’re not in when the money starts moving, you might as well hang it up.

At the same time, you just can’t sit and wait until things get better, either. If you do, you are likely to miss most of the gains.

And don’t bother trying to “time” the market. That’s a recipe for disaster, as reflected by numerous Dalbar studies. The Dalbar data repeatedly demonstrates that investors who try to time the markets not only fail miserably in the near term, over a period of years they tend to fall dramatically behind the market averages.

How much behind? Try 40%-60%, depending on what data period is examined.

Winning Markets – Big and Small

That brings me back to today’s key point. In the early stages of a rally, it’s best to invest using broad, sweeping choices like index funds or exchange-traded funds (ETFs), which are tied to the major indices. Believe it or not, picking the “right” stocks is essentially irrelevant. Sure you always want to have some zoomers in your portfolio, but when the rally really begins, it’s far more important to have broad-based stock-market exposure. It’s a shotgun approach. And it works.

Over the past 118 years, there have been 19 bear-market events in the Dow Jones Industrial Average. The average bear-market drop was 37%. The rally into the next year generated an average gain of 40% from the market bottom – with 70% of the gains coming within the first half of the rally’s duration.

That’s why, for example, I’ve repeatedly told Money Morning readers, as well as subscribers to our affiliated publications, to employ such broad choices as the Vanguard Wellington (Nasdaq: VWELX) or the SPDR S&P 500 ETF (NYSE: SPY).

Today, with the Standard & Poor’s 500 Index having zoomed 57% from its March 9 low, the rebound is 1.5 times bigger than the typical post-recessionary rally.

That means the best choices are now the companies that are backed by trillions of dollars in stimulus spending and that operate in growth markets that support real earnings, real cash flow and real purchasing power.

That makes a lot of sense if you think about it. Fully 78% of the world’s total economic activity now takes place outside U .S. borders, which means that if you really want to “follow the money,” you’ve got to look in areas that you might traditionally have considered as “off limits.” In fact, you may find that you are looking at companies whose names you can’t easily pronounce. But many of those companies not only have double- or even triple-digit growth, they are still viewed as compelling values – because of the torrid growth rates of the markets they sell to.

Take Iceland. After its financial travails, the country once again has positive gross domestic product (GDP) growth. It’s unemployment rate of 7.7% is not only dropping, it’s now well below the U.S. jobless rate of 9.8%.

Iceland was the first nation to have its currency destroyed and its finances and political government replaced.  It embraced its pain, and focused on doing what was necessary to fix its issues. Now its exports are booming, and its outlook is much better than it was just a few months ago.

Iceland has turned into an example of growth following a situation that most people thought was unfixable. From September 2008 to August 2009 – a period in which most economies were shrinking –the Icelandic economy actually expanded 2.4%. For global investors, economic growth – in the face of some of the toughest economic issues in generations – is the Holy Grail in surviving an economic crisis.

Tourism is flourishing in Iceland, as international citizens flock to that country’s shores to enjoy having a strong currency to spend.

Icelandic vocalist Bjork, 32, a former fashion model wearing silver snakeskin leggings, black boots and blond ponytail, recently told a journalist that “business is growing.” Thanks to the utsala – “SALE” – signs that were everywhere, “tourists are buying a lot these days, and even Icelanders are buying more at home.’

Granted, shopping for designer duds in Iceland with a snake-skinned model may not be your notion of a conservative-economic recovery play, but don’t miss the real point here: What Bjork was shrewdly observing was that consumers in her part of the world are no longer panicking. They’re back from the brink of almost-total collapse and have now come to terms with their nation’s economic recovery.
This demonstrates just why investors need to be looking at markets where there is real growth – from the smallest economies like Iceland, to some of the largest – such as China.

Speaking of which, with a population of 1.3 billion, a personal savings rate of 35%, and a government that isn’t suffering from a fiscal hangover, it’s no wonder the world’s leading companies are beating a path to the Red Dragon’s doorstep.

In China, the government’s focus is growth, and banks are looking for projects to invest in.  Those in positions of power and authority understand the need for balancing savings, growth and long-term investments. China’s stimulus plan focuses on infrastructure development, which will generate long-term growth, while the United States had had to use its balance sheet to prop up “zombie banks” – just to keep things from getting worse than they already are.

If this sounds a bit complex, the reality is that it’s actually quite basic. Limiting yourself to index investments at this stage of the market cycle is not your best bet. We’re now at the stage where the world’s stock markets have already delivered the broad, indiscriminate gains that benefit index-investors to more specific opportunities that require more-careful analysis and some specialization. Follow that game plan and you’ll be a long-term winner.

Source: The Two Investing Mistakes to Avoid at all Costs

I think that’s wrong. It’s an erroneous viewpoint that’s symptomatic of the short memories of the chattering media. It’s also one that could cause investors to miss out on one of the best profit plays in the global marketplace today.

I’m talking about Germany – the real powerhouse of Europe.

The “New” Germany

From the 1950s to the 1980s, West Germany consistently delivered high growth rates and low inflation. West German engineering proved superior to any other on the planet. And West German living standards rose far above anywhere else in Europe.

Then came 1990.

East and West Germany were reunited and an economic malaise set in. Instead of unifying the two currencies at a ratio of two Ostmarks to one Deutsche Mark, which would have kept East German labor cheap and competitive, the politicians unified the currencies at a rate of one to one.

That meant that East German labor was instantly priced out of the world market. And with good reason: It now offered Soviet-sector efficiency and skill – but at West German costs levels. Consequently, East Germany went through more than a decade of very high unemployment. German taxpayers went through more than a decade of huge subsidies to the former East Germany to prop up that region’s living standards and retrain its labor.

However, since the excellent German high school education system was quickly established throughout the country, the burden of reunification was a problem that did not last forever. What ultimately happened was that younger, fully trained workers in East Germany replaced their inferior Communist-era parents.

From about 2005 onward, the financial cloud of reunification costs began to lift. During the last few years, Germany’s economic performance has been notably better than its European competitors. Against Italy alone, for example, Germany’s competitiveness has improved by more than 20% since Europe’s currencies were unified in 1999.

The German economy has been held down by a tax burden that’s high by global standards. Its tax system suffers from excessive complexity and from draconian enforcement. Small businesses, for example must pay a 14% trade tax – on top of the standard corporate income tax that all businesses must pay. The trade tax goes to the “lander” (the states), rather than to the federal government.

Despite such problems, Germany has played it smart in several key areas. Unlike the United States and many other countries, Germany did not engage in fiscal stimulus. Indeed, the Social Democrat Finance Minister Peer Steinbruck last winter referred to Britain’s huge fiscal stimulus plans as “crass Keynesianism.” That showed that Germany has a true consensus against the stimulus foolishness. Germany’s budget deficit is expected by The Economist panel of forecasters to be only 4.6% of gross domestic product (GDP) in 2009, far below its rich-country competitors. Thus, even though Germany’s taxes are high, they will not be forced further upwards by zooming budget deficits.

The Angela Merkel Era Begins

Merkel’s election as German Chancellor is important, because it enables her to govern in coalition with the most free-market party, the Free Democrats, who are committed to lowering taxes and freeing up some of Germany’s restrictive labor laws.

This should not be taken too far. The Free Democrat leader Guido Westerwelle, flushed with victory, pledged Sunday night that the new government would act “responsibly” – not exactly “Hope and Change” as a slogan! Nevertheless, the Frankfurt market rose on the election result, as it should have done.

Germany is sometimes knocked for its export orientation. Its balance-of-payments surplus was $179.4 billion for the fiscal year that ended June 30, and is expected to be 4.0% of GDP this year.

Rest assured, however, that this is strength, and not a weakness. With world trade recovering, the German economy can be expected to benefit. Just look at Germany’s auto sector, which may be the most well rounded in the world. It boasts such strong luxury brands as Mercedes (NYSE ADR: DAI), Porsche and Audi. And it includes such high-volume – but innovative – manufacturers as Volkswagen AG (OTC ADR: VLKAY). German automakers are likely to gain market share against faltering U.S. competitors in the coming global recovery.

Another plus: Germany’s savings rate rose to 12.8% of GDP in the first half of 2009, a 16-year record. That compares with the feeble rate of only 4% in the United States, up from close to zero in the preceding three years. In a competitive world with the financial sector in difficulty, it’s better to be a capital-rich country running a trade surplus than the opposite, like the United States.

The economic recovery is a mixed bag from one market to another. But in Germany, it seems in Germany to be proceeding briskly. GDP, which fell sharply in the first quarter, rose at a 1.3% annual rate in the second quarter. Manufacturing orders rose by 3.5% in July, after a 3.8% rise in June. The ZEW index of economic sentiment has risen in each of the last six months, reaching a healthy 57.7 (50 is neutral) in September.

With competitive manufacturing, a business-friendly government and plenty of domestic capital, Germany is about as healthy an economy as there is in the world today. You should think about staking a claim to this outlook, even if it’s only the MSCI Germany Exchange-Traded Fund (NYSE: EWG).

Source: Why You Should Invest in the ‘New’ Germany

Investors are worried. The big question – as always – is whether the primary uptrend remains intact.

And the answer is yes.

To understand just what that target should be, let’s take a look at where we are right now.

Just before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to change the target of our buying efforts.

Although it looked like losses would be cut in the early afternoon, a lack of demand resulted in the major U.S. indices settling gently at support near the high end of the August trading range. The Dow Jones Industrial Average lost 0.4%, the Standard & Poor’s 500 Index lost 0.6%, the Nasdaq Composite Index lost 0.8%, and the Russell 2000 lost 0.5%.

All the major sector groups save healthcare finished in the red. The declines were the most severe among industrial conglomerates. The Industrials Select SPDR (NYSE: XLI) lost 1.4% thanks to a 2.5% fall in Textron Inc. (NYSE: TXT). Bank stocks were also weak as Bank of America Corp. (NYSE: BAC) dropped 2.2%. Defensive healthcare and utilities stocks were relatively buoyant with a gain of 0.1% for the Healthcare SPDR (NYSE: XLV) and just a 0.3% loss for the Utilities SPDR (NYSE: XLU).

Homebuilders were under some heavy selling pressure over the past week, likely the consequence of the U.S. Federal Reserve’s decision to slow its purchases of mortgages. By spending $1.45 trillion, the Fed kept the difference between mortgage rates and the yield on U.S. Treasury debt very low.

Now, as these purchases taper off, mortgage rates will creep higher and erode some of the awesome affordability levels that are driving buyers to take advantage of the government’s first-time homebuyer tax credit and stabilize the housing market. As a result, the iShares U.S. Home Construction ETF (NYSE: ITB) lost 2.7% on Friday and dropped 8.3% last week.

The declines of the past week have been in alignment with our expectation of a short-term correction before equities push on to what should be a more meaningful top near the 1,200 level on the S&P 500. A number of technical indicators, including the percentage of stocks over their 10-day moving average as well as breadth and volume measures, had begun to deteriorate after having moved well into overbought territory the prior two weeks.

We aim to run our portfolios for long-term holds during bull markets, so although we warned of weakness ahead we did not expect it to be serious enough to merit exiting positions. Still don’t.

The big question – always – is whether the primary uptrend remains intact. And the answer is yes. Just before Wednesday’s sell-off, measures of the supply of stocks moved to new lows, while demand moved to new highs. This means bull-market-trading rules remain in effect. But as the cyclical bull market matures a little, we need to change the target of our buying efforts.

However dramatic the action of the past few days has been, it is a sign that some normalcy is returning to the equity markets. Moving forward, it is unlikely we will see long strings of uninterrupted up days, super-strong performance in the lowest quality stocks, and high correlations between stocks. In the final push to the stimulus- and recovery-Fed reaction high that we will likely see over the next three months or so, the emphasis may shift to fundamental analysis and quality.

As you can see in the chart above, stock-performance correlations tend to spike during times of economic stress. When investors enter panic mode and analyst estimates become much less accurate, the focus shifts from individual assets to asset classes and broad sectors of the economy. In other words, when all hell breaks loose investors don’t differentiate between great companies and good companies – they throw them all out.

Once this unease subsides and economic volatility wanes, fundamental analysis once again becomes the most important driver of investment performance.  And that’s okay, because there will be plenty of opportunities as investors shift their focus from stocks that were priced for Armageddon to stocks that are poised to benefit from renewed economic expansion.

The foundations for the transition are already being laid: UBS AG (NYSE: UBS) analyst Jeffrey Palma notes that after nearly a year of downward revisions to earnings, analysts are starting to upgrade their forecasts for 2010. Estimate rebounds are largest in the cyclical materials and retail sectors. Breaking it down by region, the most promising opportunities are in commodity-related stocks in the United States, consumer stocks in Europe, and British banks.

We have recommended SPDR Metals & Mining (NYSE: XME) in our Strategic Advantage service as a great vehicle to play this trend, even though it stumbled last week. Another good one is iShares Australia (NYSE: EWA). Check out our newsletter for a much-expanded list of recommendations.

The Week in Review

Monday: The index of leading indicators jumped 0.6% in August after a 0.9% jump in July and a 0.8% jump in June. The indicators’ August performance represented the fifth consecutive monthly increase. Moreover, the 4.7% increase during these five months was the strongest showing since early 1983, which marked the beginning of one of history’s greatest bull markets.

Tuesday: Home prices backed by Fannie Mae or Freddie Mac jumped 0.3% in July. There were also indications that retail sales plummeted in the week following the Labor Day Back-to-School blitz.

Wednesday: The Federal Reserve announced it would leave interest rates unchanged. Stocks initially bounded higher before abruptly shifting direction and screaming lower. The bulls gunned the Dow Industrial Average close to the 10,000 level before things fell apart. At issue wasn’t the Fed’s target policy rate, which affects short-term interest rates. Instead, traders were apparently concerned that Fed chairman Ben Bernanke and his cohorts failed to expand its direct purchases of mortgages and government debt. This will likely result in higher long-term rates.

Credit markets, though, didn’t care, and carried on with their bull market run. Crude oil fell 4.8% to $68.33, its largest percentage loss since July on a surprise increase in inventories.

Thursday: Some momentum was lost in the housing market after weak existing homes sales numbers put an end for four straight months of gains. Sales last month came in at a million seasonality adjusted annual rate of 5.1 million — a 2.7% drop from July. We continue to see an emphasis on foreclosures with distressed sales making up 31% of total sales. The highlight: Supply of homes fell to just 8.5 months of sales, a level that is believed to reflect a balanced market. There are, however, the issues surrounding a “shadow” inventory of homes waiting for foreclosure proceedings to complete or the slightest whiff of a recovery before being listed.

Friday: The G20 wrapped up its meeting in Pittsburgh with a commitment to tighter regulation of the financial system and system to subject each country’s economic policy to a type of peer review to try to avoid the types of global imbalances — China’s export obsession and America’s credit binge — don’t happen in the future. While the latter can only be enforced by a public shaming by other countries and the International Monetary Fund, it lacks an actual penalty. But it’s a good first step.

Consumer sentiment, as measured by the University of Michigan, improved to its highest level since early 2008 after rising by nearly one-third since late last year. According to Haver Analytics, over the last 10 years there has been a 69% correlation between sentiment and growth in consumer spending.
Unfortunately, the good news didn’t extend to durable goods orders in August: There was an unexpected decline that reversed half of July’s 4.8% gain. A drop in orders for transportation equipment was fingered as the main culprit. However, this metric is quite volatility and the overall trend still points towards a rebound in the manufacturing sector.

The Week Ahead

Monday: A quiet calendar with no economic releases.

Tuesday: The latest on nationwide home prices courtesy of the excellent Case-Shiller Home Price Index. Also, we get another update on consumer confidence.

Wednesday: The government makes its final revisions to second-quarter GDP. The last revision made no change to the initial estimate of a 1% decline. In the first quarter, GDP plummeted 6.4%. Traders will be looking for indications that inventories have dropped and demand is increasing ahead of a projected inventory rebuild in the months ahead. We will also get an update on the health of the manufacturing base in the latest ISM – Chicago Business Barometer.

Wednesday will also mark the end of the third quarter.

Thursday: A busy day with an update on auto sales, personal income and spending, the latest ISM Manufacturing Index, and construction spending.

Friday: The September jobs report is expected to show a loss of 170,000 jobs compared to the 216,000 that were lost in August and a 463,000 decline in June. The unemployment rate, currently at 9.7%, will move closer to 10%. Also, we get an update on factory orders.
In summary, the start of the fourth quarter is on the horizon. We expect it to be a plus for investors, though not without growth and geopolitical scares that create S-turns and potholes. Stay positive amid the turbulence as long as corporate credit markets remain strong and the primary trend is up.

Source: Long-Term Stock-Market Uptrend to Continue

And with good reason. The United States has a bigger and more-troubled financial sector than most countries. It also has a bigger overhang from the housing bubble, has a bigger balance-of-payments deficit and has a budget deficit that’s fat enough to stall the recovery.

It would be nice to have an economic recovery to invest in that didn’t have all of these problems.

Truth be told, such an investment play does exist. What’s more, the market I have in mind is advanced enough for us to invest in it without having to go through all the rigmarole of American Depository Receipt (ADR) investing. Nor will you have to make a potentially risky foray out onto some foreign stock exchange to buy the shares, because they are almost all listed here.

The country I’m talking about is Canada. Think of it as being like home – but without the problems that our home market (the United States) currently suffers from.

Our Healthy Neighbor to the North

When the recession struck, Canada was hit by it quite badly, but for different reasons from its southern neighbor. The Canadian housing market was nowhere near as overheated as its U.S. counterpart. So Canada’s housing downturn wasn’t as deep.

And what about the banking systems? To be sure, Canadian banks received a bailout, but it was less than $20 billion in total. Compare that to the veritable alphabet soup of U.S. bailout programs ranging from “TARP” and “TALF” that have injected more than $2 trillion into the U.S. financial system.

On the other hand, natural resources prices crashed last autumn, which had a major effect on Canada’s resource-based economy. A number of large projects in the Athabasca Tar Sands region were cancelled, for example – since this region has oil reserves around the size of the entire Middle East, its development is crucial to Canada’s future.

The “loonie,” Canada’s currency, declined from around “parity” to the U.S. dollar to an exchange ratio of C$1.30=$1 U.S. In effect, this was a “flight to safety” into the dollar and U.S. Treasuries. And it affected Canada as it did other countries.

In 2009, however, Canada and the United States have traveled down totally different paths. Canada did very little “stimulus,” so its state budget is in much better shape. The deficit for the 2009-2010 fiscal year $53 billion (C$56 billion) is only about 4% of gross domestic product (GDP). For the 2010-2011 fiscal year, the deficit is expected to be about $42 billion (C$45 billion), or 3.2% of GDP.

Energy Powers the Rally

The bounce in natural resources prices has really helped power up the rebound of Canada’s market.

Investment in the tar-sands region has picked up again, with a big merger between the two largest tar-sands-extraction companies: Suncor Energy Inc. (NYSE: SU) and Petro-Canada. The rising gold price hasn’t hurt either – mines are appearing all over the place! All this new activity has made the loonie bounce, so it’s back to about C$1.07=$1. While interest rates are as low as the United States, the Bank of Canada hasn’t done much “quantitative easing,” meaning that inflation isn’t too much of a worry.

The strong loonie helps here, too.

Canada seems to be recovering nicely. Its index of leading indicators jumped 1.1% in August, while manufacturing sales grew 5.5% in July. The country presently runs a modest current account deficit, but it’s only 2% of GDP. That’s much lower than even the current U.S. deficit, let alone that of 2007. It had a little more public debt than the United States in 2008, but given current U.S. deficits, those two lines almost certainly have crossed by now.

There are two caveats. The first is an obvious one: If commodity prices crash to earth, Canada will have some difficulty because commodities are a large part of its economy. Personally, I don’t see that happening. It’s notable that PetroChina Co. Ltd. (NYSE ADR: PTR) has just invested $1.7 billion in a Canadian tar sands project, so China must not think so, either.

The other risk is political. The current minority Conservative government of Stephen Harper has done a good job, but the opposition Liberals have withdrawn their parliamentary support. That means there may be an election this autumn. A Liberal majority government would be no disaster. They might be a bit sticky about oil-drilling permits, but would not otherwise rock the boat.

However, a Liberal coalition with the leftist New Democrats could push public spending and the deficit up, and there’s no guarantee against that. (One of the problems with multi-party systems like Canada’s is there is an almost infinite variety of possible governments after each election, some of which can be fairly alarming from a business perspective.)

However, Canadian elections are a much smaller risk than you get in most countries, and the commodity/oil price crash, if it happened, would help the U.S. economy and, presumably, your U.S. portfolio. So it’s worth having some Canadian exposure, perhaps with the Canadian market exchange traded fund (ETF) iShare MSCI Canada Index (NYSE: EWC).

For years it was almost fashionable to dismiss Canada from an economic standpoint. Now, however, that may well be where the smart money would like to go. As an economy, Canada is competent and stable.

It’s the kind of country that looks to be a good place for some of our money.

With the small-cap research tool I’m about to show you, you’re well on your way to seeing how the market moves ahead of the herd.

Here’s everything you need to know…

A while back, I wrote to you about our Small-Cap Recovery Index. The index is composed of fundamental data from 100 small-cap stocks, as well as economic factors like unemployment and personal savings rate.

It’s designed to give us a glimpse at signs of recovery for the stock market.

While the market has rebounded in a big way since it bottomed in March, many investors are concerned that stock prices are already getting out of whack. But we’ve designed the Small-Cap Recovery Index to go beyond share prices.

Unlike major indexes — like the S&P 500 or small-cap Russell 2000 — ours isn’t a typical stock index. While hundreds of stocks are included in the index, stock prices actually have a relatively small effect on its daily movement. The majority of the index is based on the latest available fundamental performance.

But while gauging how “healthy” the market is can be very valuable, the Small-Cap Recovery Index provides us with considerably more data. In fact, as we continue to watch the index, we hope to use the information it provides to not only peg where the broad market is headed, but which industries hold the keys to growth.

We can accomplish this thanks to the predictive power of small-cap stocks. You see, historically, penny stocks lead the stock market out of recession. “From 1943–2007, according to one analyst, small companies outperformed large companies by more than 50 percentage points in the three years following a recession, including the one following 2001,” explained Ken Kurson in an article published on Esquire.com a few months back.

By monitoring how small caps perform fundamentally and technically, we can essentially predict where more major indexes — the S&P 500, for instance — are headed.

Now, 12 weeks into collecting and analyzing our data, we’ve already caught some indications that the index is doing its job. More on that in a bit…

A Look at the Small-Cap Market

The chart above shows the Small-Cap Recovery Index for the last 12 weeks. The index, which is calculated daily after the market close, is based on a 100 scale — its current value of 107.4 means that the Small-Cap Recovery Index has gained 7.4% since we began tracking it.

While a high number for the S&P 500, which just measures share prices, could suggest that stocks are overvalued, when it comes to the Small-Cap Recovery Index, bigger is definitely better. That’s because a higher number means that the small caps that make up our index are performing well for investors and — more importantly in this environment — performing well from a financial and economic perspective.

In the past couple of months, the index has seen its value increase materially, which is a very good thing. But while the SCRI’s value gives us a good idea of how small caps are performing, it doesn’t do a very good job of actually predicting where the markets will move next. That’s where the oscillator comes in…

The Small-Cap Recovery Index Oscillator

The Small-Cap Recovery Index Oscillator, which is based on the index itself, measures the divergence between the performance of the Small-Cap Recovery Index and the S&P 500.

While that sounds pretty complicated, it’s actually a very simple concept. The rationale is that the S&P 500, which is a pretty good indicator of the market itself, shouldn’t move significantly more or less than our Small-Cap Recovery Index. And because fundamental data that move ahead of the market — like sales and unemployment — are factored into our index, our index should set the direction of market movements first.

When things are stable, the oscillator should sit around 0 — meaning that there isn’t a major difference between our index and the S&P. But when it moves very high or low, it sends a signal that the S&P, which doesn’t have fundamental economic data to keep it grounded, should move back in a direction to push the oscillator back down.

We’ve actually come up with a math-based methodology to place bets on the market using the data that the oscillator spits out.

And while the specifics are too rigorous to detail here, we’ve determined that if you had used those rules to invest in the ProShares Ultra S&P 500 ETF (NYSEArca: SSO) or the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), depending on the buy or sell signal, you would have made 36.03% in just six weeks.

That’s an annualized gain of 312.26%!

And right now, with the oscillator (the blue line in the graph below) high, it suggests that the market’s buying frenzy is coming to an end. That’s not to say that the oscillator can’t be wrong — we’re still in the early stages of collecting data and testing its accuracy.

So what’s the SCRI Oscillator telling us right now?

While it’s good that the SCRI has increased in the last 12 weeks, a quick look at the oscillator shows us that the S&P 500 has increased much more quickly — that’s actually a bad thing for the market because it means that investors have overvalued the S&P against the fundamentals of the market.

And already, we’re seeing the S&P 500 start to decline to fall back in line with the Small-Cap Recovery Index. Unless big stocks improve their fundamentals enough to match the small-caps, it’s time to expect a tumble in the S&P back to SCRI levels. We still have considerable data to collect before we begin to use SCRI data in our stock picking methodology, but right now, it’s clear that the index could soon become a very powerful tool in our investment arsenal.

Cheers,
Jonas Elmerraji

Source: The Only Tool You Need to Predict the Market’s Moves

Was it worth it? It has been nearly two months since ProShares released its 130/30 ETF (NYSE:CSM) based on the Credit Suisse index with the same name. Has the popular strategy been able to beat the overall market as so many investors had hoped for? Or is it yet another flimsy hype-driven ETF?

When the strategy first became popular, it was the talk of many investing circles. It was so popular, the ETF world could not resist creating a fund of its own. Now investors want to know if the increased leverage and expense of long-short strategy is worth it.

For a glimpse of the recent action, here’s a chart:

As you can see, the ETF holds up to its name and does indeed outpace the market. If you had bought shares at the inception and would sell them now, you would be ahead of the S&P 500. But not by much.

Any time we discuss ETFs or mutual funds, the first thing question you need to ask is, “What is this thing going to cost me?”

After all, it takes lots of people buying and selling stocks and pushing paper to run an ETF. And until Washington gets its way, none of them do it for free.

Too much for too little

Currently, the 130/30 ETF posts an expense ratio of 0.95%, not super expensive in the world of funds, but not cheap, either. The fee is an instant handicap for a fund that is fighting to beat a tough benchmark like the S&P 500.

Really, this ETF is the lazy man’s way of taking advantage of an otherwise sound strategy. If you cannot afford the time or don’t have the investment portfolio of the size needed for a high-quality 130/30 portfolio, you are better off buying a simple, cheaper market-based fund.

If, on the other hand, you can handle the rigorous research and trading involved in the strategy, chances are you will be able to outpace the benchmark by wider margins on your own.

To really outshine the markets, your investments need to be on the tails of the market curve. An index-based ETF like this one does not offer the leverage most 130/30 investors are truly after.

Once again, the ProShares 130/30 ETF is a marketer’s dream come true, but offers little that investors could not find elsewhere at a much better price.

Source: 130/30 ETFs: All Hype and No Reward?

Several countries have seen their markets surge in the past three months: India’s market shot up 50.3 percent, Indonesia’s 39.5 percent, Singapore’s 32.8 percent, Russia’s 32.5 percent, Hong Kong’s 31.7 percent, and Chile’s 29.6 percent. But the world’s most expensive major market rose a relatively modest 24 percent. Take a look at the chart…

Taiwan’s market is outrageously expensive. In terms of price-to-earnings (P/E), it’s going for almost twice the P/E ratio of the UK’s – the next most expensive market.

Things are beginning to look up in Taiwan. Its big chip sector is seeing light at the end of the tunnel according to industry watchers. They say that equipment spending by the major chip makers will bottom out in the second quarter.

But Taiwan’s market is priced as if it’s all blue skies ahead and that’s not the case. Taiwan’s Central Bank Governor Perng Fai-nan told reporters last week that the pace of recovery in Taiwan is “relatively tepid.”

Mega Securities Co. in Taipei predicts that “The recovery will be slow, so interest rates will stay low for a long time.”

And Gartner Research says that capital spending across the semiconductor industry is expected to fall nearly 45 percent this year.

Taiwan’s market has already begun to slip and it should drop much further. The best way to play this market dip is shorting the iShares MSCI Taiwan Index (NYSE:EWT).

Source: What’s Next for the Fastest-Growing Foreign Markets?

The two emerging market nations – both members of the BRIC group (Brazil, Russia, India, and China) – will each welcome a major new IPO to their respective stock markets.

The fact that they’re debuting on the same day is purely coincidental, but the story here is that both are very significant not only to their own countries, but could also underpin the emerging market area.

Let’s take a look at these IPOs in the context of the broader emerging market topic… the effect this often volatile but flourishing pack of nations is having on the global economy – and how you can hitch a ride…

Emerging Markets Rebuilding Momentum

In the excellent movie “Wall Street,” Michael Douglas’s slimy Gordon Gekko character famously proclaims, “Greed is good. Greed works.”

Some equally unscrupulous Wall Street characters lived by this mantra. But they became so fat and bloated that they clogged the arteries of the entire financial system. Greed was most definitely not good – and it certainly didn’t work.

When the system toppled over, little was spared. Certainly not emerging market nations, which were unable to withstand the worldwide financial earthquake. While their GDP growth is rapid and their economies are flourishing, they’re still raw in terms of crucial elements like infrastructure, and are more susceptible to volatility.

So when the U.S. sneezed, the world caught Wall Street’s swine flu (ironically caused by swines in the first place). Emerging markets fared just as badly (or worse in some cases) as the U.S. and other global heavyweights like Japan and Europe.

But the big new IPOs in China and Brazil signal that the tide is gradually turning and emerging markets are rebuilding their momentum…

China’s 9-Month IPO Itch

The fallout from the global meltdown crushed China’s Shanghai Composite stock market by 60%, prompting regulators to impose a 9-month ban on new IPOs.

But on Monday, small-cap Chinese drug maker Guilin Sanjin Pharmaceutical Co. will end it by debuting on the Shenzhen market, the smallest of China’s exchanges. The move comes on the back of a scorching 58% climb for the Shanghai Composite this year, amid confidence that the government’s multi-trillion yuan of stimulus money will help the flagging manufacturing sector and trade market.

After a 9-month IPO absence, the decision to “start small” with the Guilin launch is a good one (the firm will offer 46 million shares). A mass relaunch, with bigger, more heavily hyped companies could put too many shares on the market at once – and high-profile disappointing debuts could knock confidence. When the ban was imposed, 37 companies had received IPO approval, so this may kick off a new wave.

Meanwhile, in Brazil…

Brazil Goes Big… And Lula Bangs The BRIC Drum

Like China, Brazil’s stock market is also up big this year. Not as big as Shanghai’s 58% surge, but the 35% year-to-date gain for Sao Paolo’s Ibovespa is still impressive.

Besides, Brazil is expected to take advantage of that run by notching up the biggest IPO of 2009 so far – and the biggest in its own history, too.

On Monday, credit card firm Visanet SA will hit the stock market – and is estimated to rake in $3.6 billion. That will thrash 2009’s current highest IPO – China Zhongwang Holdings, which launched on Hong Kong’s Hang Seng with $1.2 billion raised.

IPOs like these signal that the BRIC economies are once again on the move – with Brazilian president Luiz Inacio “Lula” da Silva banging the drum when leaders of the four nations met in Russia last week.

Quoted by Reuters, Lula proclaimed: “The good news is that rich countries are in crisis and emerging countries are making a huge contribution to save the economy and, consequently, save the rich countries. Wealthy countries are no longer the only ones that account for the world’s production capacity and consumption.”

That’s true. But how much of it is attributable to emerging markets?

Redressing The Global Imbalances… BRIC-Style

The BRIC meeting last week was a chance for the four leading emerging market nations to come together and plot their triumph over the mammoth, industrialized economies.

Okay, not quite. But in the first summit of its kind, the four countries definitely did discuss using their existing strength to enhance their fortunes on the global market even further.

In short, that means addressing the balance of the global financial system – a debate that included ideas on how to create more diversity away from the U.S. dollar as the world’s dominant currency and give the BRIC nations better representation on the global stage.

Or, as Lula da Silva and Russian president Dmitri Medvedev respectively put it, to “change the political and trade geography of the world” and “create conditions for a more just world order.”

Medvedev argues that you can’t have a balanced, successful global system if most of the markets are priced in U.S. dollars. He’d like to redress that imbalance by having Russia buy bonds from the other BRIC nations in return for them upping their ruble reserves.

But with the Russian ruble, Brazilian real, and Indian rupee down 35%, 25%, and 35% this year respectively, those currencies aren’t exactly blowing the dollar out of the water.

So can the BRIC succeed with its plans?

These Davids Won’t Slay Goliath… Yet

According to Reuters, the BRIC nations currently account for about 15% of the global economy.

In addition, while the U.S. racks up GDP of about $14 trillion per year alone, the BRIC nations’ combined total is only about $9.4 trillion. And the GDP per capita, poverty levels, and infrastructure in these countries are significantly worse than in the U.S., with America doubling the output of the BRIC countries combined.

So the BRIC group clearly has a long way to go to usurp the big boys. But Goldman Sachs predicts that by joining forces, it’s possible that the BRIC nations could surpass the G7 in 20 years time, with China’s economy climbing above the U.S.

However, with China’s GDP almost surpassing the combined total of its three fellow BRIC members, the group itself is imbalanced. In addition, the BRIC is not a formal union. All four countries have substantial differences and while they remain heavily tied to the U.S. and other big nations in terms of trade (with India and Russia receiving U.S. aid, too), there’s no way any of them want to rattle the saber by laying down the gauntlet. Not while they also hold almost one-third of U.S. Treasuries.

What they do have in their favor at the moment, though, is GDP growth…

An Emerging World Of Growth

China: 9%.
Russia: 8%.
India: 6.7%.
Brazil: 5%.

Those were the GDP growth totals for the BRIC nations in 2008, compared with the U.S. economy’s contraction of more than 6%. And even the BRIC’s current impressive pace is a slowdown from the red-hot growth seen before that.

What’s more, that growth isn’t artificially stimulated by government printing presses alone. The economies are growing in their own right.

This year, China and India are expected to grow by 7.2% and 6.2% respectively, with China accelerating to pre-global meltdown levels of 8% and 9% during the third and fourth quarter.

So with that, some investment options for you…

Investing In The BRICs

For the sake of diversity and ease of investment, I’m going to focus on ETFs here.

If you want a broad emerging market play, take a look at the iShares MSCI Emerging Markets ETF (NYSE: EEM).

For investments in the specific BRIC nations combined, consider these:

~ iShares MSCI BRIC (NYSE: BKF)

~ SPDR S&P BRIC 40 (NYSE:BIK)

And for investments in the specific BRIC nations individually, take a look at the following:

~ China: iShares FTSE/Xinhua China 25 Index (NYSE: FXI)

~ India: PowerShares India (NYSE:PIN) or WisdomTree India Earnings (NYSE: EPI)

~ Brazil: iShares MSCI Brazil Index (NYSE: EWZ)

~ Russia: Market Vectors Russia ETF (NYSE: RSX)
Best regards,

Martin Denholm

Source: Monday Will Be a Big Day for These Two Emerging Market Nations

A quick glance at the scoreboard proves my criticism was spot-on…

While the S&P 500 Index slumped 38.5% in 2008, 30 countries witnessed drops of 50% or more. Even more telling, the poster children for the decoupling trade: Brazil (-41.2%), Russia (-72.4%), India (-52.45%) and China (-65.39%) didn’t escape punishment either, despite wild predictions they would…

Clearly, the old adage still applies, “When the United States sneezes, the rest of the world catches a cold.” (Or in some cases, like Russia, they get pneumonia.)

So why resurrect the past? Because decoupling diehards won’t let this junk science die. And sadly, another warning is in order…

Decoupling 2.0 – Redefining The Theory

On the back of an impressive rebound in emerging markets this year, the decoupling chatter is back. Only this time, followers are calling it “Decoupling 2.0.” And they’ve redefined their theory…

As The Economist reveals, “Decoupling 2.0 is a narrower phenomenon, confined to a few of the biggest, and least indebted, emerging economies.” Ones with “strong domestic markets and prudent macroeconomic policies.”

Funny. I read that “redefinition” and think how badly some pundits want decoupling to work out.

It’s still the same farce, however.

• You see, globalization – an undeniable, decades-old, economic force – created one quantum entanglement.
• World markets are inextricably tied together in knots, whether we want them to be or not.
• And if they can ever be untangled, it will take years (likely decades), not a few quarters.

So, as the Decoupling 2.0 banter picks up, let me offer up a dissenting voice – and warn you.

First, don’t be mislead by the headlines…

• Yes, Chinese stocks are up 44.6% in 2009.
• Yes, Brazil rebounded 39.7%.
• Yes, India staged a 51.6% comeback.
• Yes, Russia came roaring back 72.1%.
• And yes, the United States only mustered a pathetic 0.22% gain.
• But nothing’s really changed.

The United States remains the engine of economic growth. How else do you explain the fact that the equity markets continue to move in lockstep?

As you can see in the chart below, some of the BRIC nations started to rebound sooner, but they sold off in February, just like the United States. And they didn’t really gain momentum until after signs that the U.S. economy would fight another day materialized.

Chart Source: Bespoke Investment Group

Decoupling Advocates: Countering The Obvious With Nonsense…

Decoupling adherents will counter this evidence, saying the equity markets might still be coupled, but the underlying economies most certainly are not. Nonsense.

If an economy is doing well that means businesses are doing well. And if businesses are doing well – and most are publicly traded – stock markets will be doing well. You can’t separate the two.

That leads me to the second part of my warning. Whatever you do, don’t abandon your U.S. investments or significantly overweight your portfolios to these “decoupled” international markets.

If you did so the last time, your portfolio got hammered. In fact, if you moved all your investments into China or Russia at the start of 2008, like some investors I know, you’re still worse off than the patriotic fellow that invested in nothing but U.S. stocks.

A hypothetical $100,000 portfolio of U.S. stocks is now worth $61,655, compared to $50,046 had you held all China stocks, and $47,500 had you had nothing but exposure to Russian stocks.

While Decoupling May Be A Farce – Don’t Ignore Emerging Markets

Let me be clear, although decoupling is a farce, that doesn’t mean we should ignore international and emerging markets altogether. That would be foolish. These markets lay claim to stronger domestic growth and more options (higher interest rates and billions in foreign reserves) to stimulate further growth.

What I am recommending, instead, is that you capitalize on these strengths in a more intelligent manner. Instead of going “all-in” so to speak, place a more reasonable wager. Specifically, stick to the tried principles of asset allocation. After all, the theory behind it won a Nobel Prize. Meanwhile, Decoupling 2.0 isn’t even legitimate enough to garner a nomination.

So instead of plowing all your money into international stocks, only allocate a portion. At The Oxford Club we recommend a 30% allocation to international stocks. That’s just the right amount of exposure to profit, without taking unnecessary risk.

In terms of specific investments, I recommend the low-cost, no-hassle, diversified, indexing approach.

• Either the iShares MSCI EAFE Index (AMEX: EFA), which holds positions in 838 companies.
• Or the iShares MSCI Emerging Markets ETF (AMEX: EEM), which holds positions in 340 companies.
• If you want a more concentrated, high profit potential pick, hire a professional. Specifically Mark Mobius and the Templeton Emerging Markets Fund (NYSE: EMF). No one can touch his 40-year track record in emerging markets, even recently. Since the March 9 bottom, his closed-end fund is up 65%.

Good investing,

Louis Basenese

Source: Decoupling Is Still Dead And Here’s The Proof

One day I told my lovely wife to get her passport ready because we were going to Moscow.  She was quite excited because Moscow is a shopping mecca with many historical sites to see.  But, I assure you—I was there for business.

We traveled to Russia in December of last year and I saw firsthand how the country operates.  I observed that the Russians are a hard working and productive people that just want the best for their families.  Russians are striving for a better quality of life just like anyone else.  I knew right away that the country offers investor’s high profit potential.

I assure you that Russia is still a super power and their society is quite advanced.  The energy sector in Russia is still a powerful force in the world.  Plus, Russia is one of the biggest producers of palladium, platinum, diamonds, nickel and gold.  Russia is a natural resource power house and should do great as commodity prices skyrocket.

When I got back to America I watched the Russian markets for some time and waited for the right moment to tell you to invest.

Then on 04/09/09 in this column, I wrote:

“the Russian market is way oversold and now is a good time to be a contrarian investor and invest when no one else will.”

I told you to buy the Market Vectors Russia ETF (RSX).  This Exchange Traded Fund holds a basket of Russian stocks and seeks to mirror the Russian stock market as measured by the DAX Global Russia+ Index.

I hope you took the advice.  If so, you’re sitting on a 39% gain in just 53 days.  And that’s not the only profitable advice you’ve received for free in these pages…

In fact, just this year I sent you lots of big winners including:

7% SPDR Gold Shares (GLD)
21% iShares Silver Trust (SLV)
85% Freeport-McMoRan Copper & Gold Inc. (FCX)
45% Plum Creek Timber (PCL)
13% PowerShares DB Agriculture ETF (DBA)
26% iShares MSCI Brazil Index (EWZ)
39% Market Vectors Russia ETF (RSX)
29% PowerShares India ETF (PIN)
18% iShares FTSE/Xinhua China 25 Index ETF (FXI)
13% The Coca-Cola Company (KO)
11% Market Vectors Agribusiness ETF (MOO)

If you missed this opportunity to get into any of the above positions, it’s not too late.  Each one of these picks has the potential to run much higher.

I’m sure you are happy we deliver these great ideas for FREE in this Investor’s Daily Edge daily newsletter.  Our staff here at Investor’s Daily Edge strives to give you information that can help you accumulate wealth and enhance your financial well-being.

Now I have an important favor to ask of you.  I need you to tell your friends and family to sign up for our free daily newsletter.  Simply just tell them to go to http://www.investorsdailyedge.com/ and sign up.  Or forward this email to everyone in your address book.

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Tell your friends and family that can benefit from independent and profitable financial insight.

Thank You,

Ted Peroulakis

Source: The Russia Pick I Recommended to You Is Up 39 in 53 Days