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U.S. Stocks In 2016? Keep An Eye On The Global Economy

You may not want to risk capital in overseas stocks until foreign countries and regions begin to respond to stimulus via economic expansion. Right now, most are mired in stagnation, recession or depression. Absent a desirable revival abroad, 2016 could be tough sledding for the U.S. economy and the heralded S&P 500. During the previous bull market (10/02-10/07), financial media fawned over the critical importance of diversifying one’s equity exposure across the globe. And why not? Performance for foreign exchange-traded trackers like iShares MSCI EAFE (NYSEARCA: EFA ) and iShares MSCI Emerging Markets (NYSEARCA: EEM ) far surpassed anything the S&P 500 could muster up; developed international markets doubled U.S. capital appreciation while emerging economies catapulted 350%! Indeed, when I spoke at conferences 10 years ago, attendees rarely inquired about companies listed on the NASDAQ or the New York Stock Exchange (NYSE). They wanted to know if they should add a materials exporting giant like iShares South Africa (NYSEARCA: EZA ) to their portfolios or whether or not iShares Small Cap Brazil (NYSEARCA: BRF ) would be a sensible way to tap consumer purchasing power in Latin America. Accessing overseas markets dominated speaker presentations as well as listener curiosity. In 2000, the financial planning community typically rallied around a 20% equity allocation to foreign stock. By 2007, the 20% recommendation jumped to 50%. The reason? Well-diversified investors were supposed to account for the world’s market capitalization, where one-half of the world’s market cap belonged to non-U.S. securities. So what happened to the notion of a globally diversified portfolio? Worldly investor perspectives? Could it be that, since the eurozone crisis in 2011, U.S. stocks have crushed foreign equities? Maybe it is easier for CNBC and Bloomberg to praise U.S. stock price gains while ignoring bearish price depreciation in foreign equity holdings — significant positions in the static allocation of the buy-n-hold viewership. Mainstream financial commentators may choose to focus on the progress of the S&P 500 alone. They may choose to ignore c orrective activity in small caps via the Russell 2000, high yield bonds via SPDR S&P High Yield Corporate (NYSEARCA: JNK ) and transporters via the Dow Jones Transportation Average. Yet ignoring bearishness in asset prices around the world is particularly near-sighted, if for no other reason that global economic weakness is the biggest threat to the worldwide profits and the worldwide revenue of large U.S.-based corporations. The FTSE All-World Index may be particularly relevant. This benchmark covers the overwhelming majority of the world’s investable market capitalization. Its global perspective is heavily weighted toward developed regions, including the United States (52.5%), Europe with the United Kingdom (19.5%) and Japan (8.5%). Nine of the top 10 corporate constituents are U.S. companies. Some trends are easier to spot than others. For example, the FTSE All-World Index has not appreciated in price for nearly two years. Its 200-day long-term trendline currently slopes downward. And the benchmark is roughly 9% below its summertime peak. The good news? Prices are well above their October lows. It follows that the global benchmark may or may not have completed a 16%-17% correction several months earlier. Make no mistake about it, though. Large-cap U.S. companies like Microsoft, Amazon, Facebook, General Electric and Wells Fargo are responsible for the “resilience” of the FTSE All-World Index. Either key economies around the world – Europe, the United Kingdom, China, Japan – pull out of their collective funk in 2016, or U.S. large-cap stocks will eventually buckle. Top-line revenue has already declined in every quarter of 2015; non-dollar denominate profits have also taken a toll on multi-national players. Equally worrisome, foreign demand has been noticeably weak in the export data. In sum, you may not want to risk capital in overseas stocks until foreign countries and regions begin to respond to stimulus via economic expansion. Right now, most are mired in stagnation, recession or depression. Absent a desirable revival abroad, 2016 could be tough sledding for the U.S. economy and the heralded S&P 500. Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.

The Tree Is Up With The Best ETFs

Christmas isn’t Christmas without a tree. While the evergreen never fails to bring in cheer to the most lonesome of hearts, we decided to do something very different this year – build a tree with the choicest of ETFs of the season. Let’s build the base first, which is the most valuable of all for investors, and of course, where all the gifts are to be found. And what’s more fitting than the broad market ETF, the SPDR S&P 500 (NYSEARCA: SPY ) , which tracks the major U.S. benchmark – the S&P 500 index – to give a solid foundation to our tree. It holds 506 stocks in its basket that are widely spread out across a number of sectors and securities. None of the securities hold more than 3.4% share while information technology, financials, healthcare, consumer discretionary, and industrials are the top five sectors accounting for double-digit exposure each. The product has $174.8 billion in AUM and charges 9 bps in fees per year. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. Since the stock market tends to rise on holiday optimism and year-end seasonal factors, high beta and high momentum ETFs are expected to lead the market in the weeks ahead. This is because high beta funds experience larger gains than the broader market counterparts in a soaring market. On the other hand, momentum investing should be a winning strategy for investors seeking higher returns in a short spell in any market environment. This strategy seeks to take advantage of market volatility by buying hot stocks, which have shown an uptrend over a few weeks or a few months, and selling those stocks that are going down. So, a couple of high beta and momentum ETFs could be the best option to include in our Christmas tree. In particular, the PowerShares S&P 500 High Beta Portfolio ETF (NYSEARCA: SPHB ) and the First Trust Dorsey Wright Focus 5 ETF (NASDAQ: FV ) are the most popular choices in their respective areas. They went in to form the fronds and leaves of the tree. SPHB tracks the performance of 100 stocks from the S&P 500 Index with the highest beta over the past 12 months. It has amassed $65.7 million in its asset base and charges 0.25% in expense ratio. The product is widely spread out across each security as none of them holds more than 1.54% of total assets. About one-fourth of the portfolio is allotted to energy, while financials, information technology and healthcare round off the next three spots with double-digit exposure each. FV on the other hand tracks the Dorsey Wright Focus Five Index, which provides targeted exposure to the five First Trust sector and industry-based ETFs that Dorsey, Wright & Associates (DWA) believes have the maximum chance of outperforming the other ETFs in the selection universe. Securities with high relative strength scores (strong momentum) are given higher weights. Currently, the product has the highest exposure to the biotech sector via the First Trust NYSE Arca Biotechnology Index ETF (NYSEARCA: FBT ) at 24.8%, followed by the First Trust DJ Internet Index ETF (NYSEARCA: FDN ) and the First Trust Health Care AlphaDEX ETF (NYSEARCA: FXH ) at 21.0% and 19.3%, respectively. It has accumulated nearly $4.6 billion in AUM while it charges 94 bps in annual fees. For the top layers, we’ve included financial ETFs like the Financial Select Sector SPDR ETF (NYSEARCA: XLF ) as the sector is a major beneficiary of a rising interest rate environment. This is the most popular financial ETF with AUM of $19.1 billion and an expense ratio of 0.14%. The fund follows the Financial Select Sector Index, holding 89 stocks in its basket. It is heavily concentrated in the top five firms that collectively make up 36.7% of the portfolio while the other firms hold less than 2.6% share. At the very top is the star ETF of the year – the First Trust Dow Jones Internet Index ETF ( FDN ) . The fund offers exposure to the Internet corner of the broad technology space by tracking the Dow Jones Internet Composite Index. In total, it holds a small basket of 42 securities with double-digit allocation in the top two firms. The ETF has amassed $4.87 billion in AUM while charging 54 in fees. Now that we are done with the tree’s structure, we are left with decorating it with lights and chocolates. For this, the best ETFs that could fit in here are the iPath Pure Beta Cocoa ETN (NYSEARCA: CHOC ) for the chocolate decor, and most importantly the Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) for lighting up the tree. And voila, the tree is up! May it bring in bountiful returns for the investor with the jingle of Santa’s bells. Original Post

Adding To Positions: A Simple Rule

I want to share a simple rule that has worked well for me over the years. I’ll explain the how and why, and then wrap up with some thoughts about when this rule might not be appropriate. So, imagine you are in a position, and then, for whatever reason, you know it’s right . In fact, it’s so right that it’s time to add to the position, and so you do. Now, think about what happens if the trade turns out to not be right, or to not develop as you expected – what do you do? Here’s the rule: if you add to an existing position and it does not work out as expected, you must get out of more than you added . Simple rule, but effective. To put numbers to the idea, say you are long 5,000 shares of a stock. As the trade moves in your favor, you get a signal to add to the trade (and that “signal” could cover many possibilities.) So, you add 2,000 shares. Somewhere down the road, the trade does not work out, and probably is under the price at which you added. Now, you know the right thing to do is to reduce the position size, and you must do so, but how much do you sell? Answer: more than 2,000, and probably more like 4,000 than 2,100. You now hold less than the original position size, and you’ve booked a loss on part of the position, but you’ve also reduced your risk on a trade that was not developing as you thought it might. One of the classic trading mistakes is to have on a winning trade, add inappropriately, and have that trade become a losing trade. For some traders, being aggressive and pressing when they have a good trade can add to the bottom line, but there is a tradeoff: when you become more aggressive you do so by taking more risk. The psychological swing – going from aggressive to wrong – can be one of the most challenging experiences for a trader, and many mistakes happen in this heightened emotional space. The rule of exiting more than you added is a simple rule, but it protects you from yourself. Now, no rule fits all styles of trading all the time. There could be styles of trading for which this is inappropriate, (for instance, when we add planning to scale in as the trade moves against the entry.) However, for “simple”, directional technical trading, this rule might be helpful in many cases. So much of the task of trading is just about avoiding errors and mistakes, and correct rules lead to good trading.