Materials, Emerging Market ETFs Rally on QE3

September 17, 2012 /

Basic materials and emerging market ETFs floated to the top of the leader list Friday as investors dove into risk assets head first Friday, following the Federal Reserve’s jump into the liquidity pool. Treasury and other fixed-income ETFs lagged the most as investors dumped safe havens. The dollar plunged to a 10-month low.

By midday, Global X Copper Miners ETF ( COPX ) had gapped up 4.07% to a four-month high. Its IBD Accumulation-Distribution Rating has improved from a low D+ to a strong B+, indicating institutions are buying more shares than selling. ETFs tracking precious metals, coal, oil and industrial metals producers also rallied.

IPath DJ-UBS Copper ETN ( JJC ) also gapped up to a four-month high, gaining 2.47%. ETFs tracking tin and aluminum also surged to new highs.

PowerShares DB U.S. Dollar Index Bullish ( UUP ), measuring the dollar against a basket of foreign currencies, dropped 0.44% to its lowest price since November 2011.

The buying onslaught is purely a knee-jerk reaction to the Fed’s move, said Kimberly DuBord, director of research at The Fed pledged Thursday to buy $40 billion a month in mortgage-backed securities indefinitely in hopes of stimulating the economy and pushing up asset prices.

“At the end of the day, the economic conditions globally are slowing,” she said. “In some parts, they’re slowing faster than expectations.”

The uptrend should be sustainable through the end of the year, says Mitch Reiner, managing partner of Wela Strategies and chief operating officer of Capital Investment Advisors in Atlanta.

“But we worry about a global economic recession, with Europe, Great Britain and China all showing signs of slow or no growth,” he said.

The U.S., the European Union and China are all engaging in economic stimulus, which tends to boost commodity prices. The Fed wants to devalue the dollar to make U.S. exports more competitive abroad.

“I believe copper and materials investing has some merit amid global injections of capital, but I would set tight stops and be cautious,” said Terry Sacka, chief strategist at Cornerstone Asset Metals in Palm Beach Gardens, Fla. “They may be stimulating the global economies, but that doesn’t mean it will work.”

From Worst To First

Copper and the producers severely underperformed most commodities and the market this year before finding a floor in late July. COPX has rallied 32% off of its 52-week low. But it’s up only 1.5% year to date and it’s lost 9.27% over the past 12 months, while the MSCI World Index is ahead 14.4% and 20% over the same periods, according to Morningstar.

JJC has jumped 17% off its 52-week low in early August. JJC is up 7.7% year to date but is down 8.1% over the past year. Commodities on average rose 12.7% and 2.3% over the same time.

“The move appears to be very early, given the massive underperformance copper has experienced relative to broader risk assets such as the S&P 500,” said Michael Gayed, chief investment strategist at Pension Partners. “With central banks around the world unleashing monetary shock and awe to counter deflation through ‘any means necessary’ and as expectations build for China to act more proactively, copper could go from being worst to first in the coming months.”

The markets were oversold on fears that the European debt crisis would evolve into the next Lehman Bros., he added. When the eurozone didn’t break up and the U.S. didn’t fall into a double-dip recession, the uptrend has taken everyone by surprise.

“As the European Central Bank reliquefies the system and confidence in the euro increases, it means demand likely recovers when few thought it could,” he said. “This fundamentally means earnings of companies in the U.S. improve (because of) exports.”

Emerging Market Rally

IShares MSCI Emerging Markets Index ( EEM ) jumped as high as 2.2% in morning trade, then steadily declined.
IShares MSCI EAFE Index ( EFA ), tracking developed foreign markets, vaulted 1.8% in morning trade, but started drifting lower in the afternoon.

Aside from increased appetite for risk, low valuations into emerging markets, which have underperformed the U.S. and developed markets the past year. EEM trades at a price-to-earnings ratio of 11 vs. 12 for EFA and 14 for the S&P 500.

“Current valuations do not appear stretched given where interest rates are,” said Daniel Beckerman of Beckerman Institutional. “Also, if you examine the stock market moves after the major QE programs since early 2009, you had a better than 20% rally each time.”

Global X FTSE Argentina 20 ETF (ARGT) surged 4.41% to a four-month high. But it’s still trading below its 200-day moving average and needs more work to confirm a viable trend change.

IShares S&P India Nifty 50 Index (INDY) pushed up 4.01% to a five-month high. It broke above the key 200-day moving average Tuesday and has been flying high ever since.

WisdomTree India Earnings (EPI) gained 3.29%, breaking above its 200-day moving average for the first time in six months and confirming a new uptrend. It has a weak IBD Relative Strength Rating but a stellar A- Accumulation-Distribution Rating.

“Emerging-market risks are primarily related to China, as China is the driver of emerging-market growth presently, and how the authorities manage the present slowdown is critical to emerging market assets,” said David Hinman, chief investment officer of SW Asset Management, which specializes in emerging market debts.


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