In early 2000, there were a handful of indexes that may have climbed more than 20 percentage points above a long-term trendline. You probably could have counted a number of individual companies that made it to 30% above the 200-day moving average.
Right now? Hundreds of diversified index funds are more than 20% above the ever-popular 200-day MA. In fact, the PowerShares QQQ (QQQQ), the S&P MidCap 400 (MDY), and the iShares Russell 2000 (IWM) are among them.
Do people really wonder why traders are calling for a pullback? Even with a market that is neither overvalued nor undervalued, according to the 10-year Shiller P/E, fundamental analysts have to be concerned.
What may be particularly surprising? The 200-day moving average won't be able to help guide anyone looking for a direction on ETFs that are 30% to 40% above the line. One needs to become more familiar with stop-losses.
These 5 well-known ETFs are more than 40 percentage points above a respective 200-day MA:
|5 ETFs That Are More Than 40% Above 200-Day MA|
|% Above||YTD Gains|
|iShares MSCI Brazil (EWZ)|
|MArketVectors Russia (RSX)|
|iShares MSCI Sweden (EWD)|
|Market Vectors Coal (KOL)|
|iShares MSCI Turkey (TUR)|
In most of the above-mentioned instances, the natural resource recovery (China commodity grab) is at work. Russia (RSX), Coal (KOL) and Brazil (EWZ) are heavily dependent on perceived demand for energy, oil and materials.
Yet natural resources and commodities are facing increasing regulation on the U.S exchanges. That may further push overbought resource-related ETFs down.
Consider the environment. The Commodities Futures Trading Commission (CTFC) has hinted at future regulation that has caused a variety of ETFs to stop issuing additional shares. For example, the United States Natural Gas Fund (UNG) trades at a sharp premium. (Note: ETFs are supposed to trade at their underlying net asset value, not at premiums or discounts.)
A more recent casualty of war is the iShares S&P GSCI Commodity Index Trust (GSG). The iShares family explained that it would stop issuing new shares once the fund accumulated $55.9 million in assets, and they are only 6% away from hitting that target. The implications here is that GSG will become similar to UNG... trading at a premium or discount to underlying net asset value.
Granted, the CTFC is making it harder for small investors to get clear, simple, ETF exposure to the commodity space. Yet this does not mean that commodity ETFs will disappear into the night.
In essence, we'll be seeing likely changes to the composition of the indexes that commodity funds track. Due to the particular concerns of the CFTC regarding oil and agriculture, funds like DBC and DBO will have to represent different commodity holdings than they do today. Effectively, Powershares will have to sell some ag holdings and buy some other types of ag for a wider range of food stuff. DBC will have a much smaller oil/gas component, as well as smaller ag. Meanwhile, DBO's fate seems the most uncertain, since it is a single commodity facing potential restrictions.
If you get continued thirst out of China, more dollar weakening, soybean surges as well as Canadian/South African mine strikes, you'd get greater demand for commodities across the board. The truth, however, is that investor shouldn't expect the gains to occur unabated; the trends appear to be exceptionally long-term ones indeed. Any sign of faltering economic progress in U.S. and foreign economies will likely see pressure on everything other than precious metals.
If you'd like to learn more about ETF investing... then tune into In the Money With Gary Gordon. You can listen to the show live or via podcast or on your iPod.
Disclosure Statement: ETF Expert is a web log (blog) that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.