Where Has All of the Fear Gone?

Doug Fabian
Posted: Jun 13, 2014 12:01 AM
Where Has All of the Fear Gone?

I don’t know about you, but I always have at least a little fear in my head whenever I put my money to work in the financial markets. Now, I don’t let this healthy sense of skepticism about the positive direction in stocks rule my world; however, it is just plain smart to be on the lookout for the “fear factor” operating in stocks.

Well, so far, the fear seems all but gone from this market.

One way to measure this fear factor numerically is via the CBOE Volatility Index, or VIX. The VIX tells us what investors are willing to pay for options protection from a down market. Recently, the VIX plummeted to a five-year low, and that tells us that there is virtually no real fear out there about a market pullback.

I recentlyread an interesting takeon the markets and the lack of a pullback in stocks from one of my favorite market strategists, Jeff Saut, of Raymond James. Saut’s view is that we are in a secular bull market, but he also predicts that in the short run we are overdue for a pullback. I agree with him, but right now, the fear factor that could lead to some selling is just not present.

Still, when you think of a market as resilient as this one has been during the past several years, you should start to get at least a little sense of fear. Just the fact that it has been some 20 months since the last 10% correction in equities should give us all pause.

Now, as you likely know, when most pros out there refer to “the market,” they are referring primarily to U.S. equities. And while indices such as the Dow and S&P 500 have been hitting new highs this year, they still lag other markets around the globe. For example, the year-to-date (YTD) return in the S&P 500 is 5.6%. Not bad, unless you compare that gain to stocks in India, which are up some 25% this year, and Turkey, which is up 24%.

I am watching these booming markets right now, but one market I am paying very close attention to is China (see today’s ETF Talk). China has been in the doldrums for several years, and there is no shortage of stories about the slowdown in the rate of the country’s economic growth, the real estate bubble or the lack of transparency in official economic data.

Still, China remains an economic powerhouse, and it is the second-largest economy in the world. If the economic data in China continues to improve, and if the smart money continues to pour into the region, we will continue to see more upside in China.

To find out how you can take advantage of moves in China, emerging markets, bonds and many other market sectors using exchange-traded funds, check out mySuccessful ETF Investingnewsletter right now.

ETF Talk: China May Be Ripe for a Rebound

We are rapidly approaching the end of the second quarter and it remains unclear what role China will play in the global growth story. The International Monetary Fund currently projects Chinese growth at a rate that would be the envy of most developed economies and above the average for emerging markets, but the pace doesn’t match China’s meteoric growth of recent memory. If you do wish to invest in China’s potential growth, one way to dip your toe in those waters is through the iShares China Large-Cap ETF (FXI).

This fund attempts to match the price and yield performance, before fees and expenses, of an investment fund focused on the 25 largest and most liquid Chinese companies traded on the Hong Kong Stock Exchange. These companies operate in mainland China and include red chips (Chinese companies incorporated outside China), p chips (Chinese companies incorporated in the Cayman Islands, Bermuda and the British Virgin Islands) and H Shares (companies incorporated inside mainland China).

The exchange-traded fund (ETF) is down about 1% this year, largely due to drops in February and March. FXI has nearly recovered from these dips and is currently trading well above both its 50- and 200-day moving averages. This ascent reflects the slightly positive May Purchasing Managers’ Index, which indicated continued soft growth. FXI also offers a yield of 2.76%.

FXI invests most heavily in financials, 52.25%; telecommunications, 14.78%; and oil & gas, 12.44%. This ETF’s top 10 holdings make up 59.77% of its portfolio. Companies in this top 10 include Chinese Construction Bank H Shares, 9.21%; Tencent Holdings Ltd, 8.76%; China Mobile Ltd, 7.90%; Industrial & Commercial Bank of China H Shares, 7.20%; and Bank of China, Ltd H Shares, 6.44%.

China’s government has indicated that it will be taking measures to ensure that the country’s economic growth continues to match expectations. The open question is whether this support will take the form of continuing to deregulate financial services and other market-liberalization measures, or whether the government will keep pouring money into infrastructure. Of course, it also remains to be seen if either of these measures will be effective.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my Successful ETF Investing newsletter. As always, I am happy to answer any of your questions about ETFs, so do not hesitate to send me an e-mail. You just may see your question answered in a future ETF Talk.