Thu 19 Jan 2006
Major market averages have retreated somewhat after reaching new five-year highs. The intermediate trend has turned negative so for the next few weeks, markets are likely to have a downward bias. The action of the past week points out some of the problems of trying to follow the markets based on mainstream media reports. The talking heads on financial news networks tend to be late with their observations and they often have trouble sifting the chaff from the wheat.
Once the Nasdaq, Dow and S&P 500 peaked last week media reports made it sound like stocks were taking off on a new major bull rally. Based on the commentary, one would think the upward move was massive and those who were invested were getting rich while those who weren’t were missing a huge opportunity. While there has been some upward movement, it isn’t as dramatic as you might think. Since December 2005, the Nasdaq is up less than 3%. The S&P has gained about 2% and the Dow is up less than half a percent. So if you were out of the market and kicking yourself about missing this move, don’t sweat it.
On the other hand, during the same period there were significant gains in select market sectors. Most people probably won’t be surprised to learn that energy has performed well over that time. After all, the price of crude oil is back in the $65 a barrel range. But some international funds have done equally well.
I’m including a chart that shows some of these top sectors.
Let’s start with the light blue line first. It is QQQ, the Nasdaq tracking ETF. As mentioned, since the start of December this fund is up 2.6%. The purple line is Merrill Lynch Pharmaceutical HOLDRS (PPH). For the same period, this ETF is up 8.38%. Better still is the 11.51% gain turned in by iShares MSCI - Emerging Markets Index Fund (EEM), indicated by the yellow line. The green line is energy–specifically Oil Service HOLDRS OIH, up 14.75%. Other energy ETFs are not doing quite as well, but most have double-digit returns for this period. Finally, the red line is iShares MSCI - South Africa Index Fund (EZA), up 19.46%.
These are not all the ETFs that have done well during this time. I have chosen them because they are representative of sectors. For example, IShares S&P Latin America 40 Index Fund (ILF) is up 8.04%. Select Sector SPDR - Energy (XLE) is up 11.22%. IShares MSCI - South Korea Index Fund (EWY), the top-performing ETF in 2005, is up 9.96% over this period. StreetTRACKS Gold Trust (GLD) has gained 10.12%.
A listing of the top-performing ETFs during this time frame is dominated by international funds and energy funds. If that sounds familiar, it’s because it is the same situation we saw most of 2005. There were brief periods when other sectors would pop up for a few weeks, but for most of the year, energy and international funds produced the better returns.
Going forward, I’m suspicious of energy, because I’m not certain oil prices will continue to rise significantly above the current level. Higher oil prices bring the threat of inflation and run the risk of stalling current economic growth. So there will be a lot of pressure to keep oil prices constrained. But that doesn’t mean it will be possible to do so.
International funds–particularly the emerging market funds–obviously remain in an uptrend. And one of the oldest and truest adages of Wall Street says that you don’t bet against a trend. If I had to make a forecast, I don’t see any compelling reason why these funds won’t continue to do well going forward.
Have a great weekend. We’re currently buried in snow and I hoping for a sunny day so we can start to dig out.
If you haven’t had a chance to check out Strategis Financial Group’s FundTrader program, you really might want to take a look. Final 2005 numbers are in and net return for two of the three models were in the triple digits. Here is a link with more information: