It’s one thing to claim¬†that the stock market is pricing in Armageddon… that emotionality is trumping¬†rationality. It’s another thing to dismiss investor fears as silly or absurd.
Along these lines, the researchers at Bespoke published a fascinating table of “technically oversold” ETFs. In Analystville,¬†one may regard an ETF as oversold when its current price is more than¬†10% below a 50-day moving average. Bespoke’s list actually included¬†ETFs¬†that¬†plummeted more than¬†15% below the popular 50-day¬†trendline. Big time oversold, right?
However, a quick perusal of the “Oversold ETF Table” demonstrates that representatives may be quite different from one another. Whereas many large-cap stock ETFs present attractive trailing P/E multiples of 13 or less,¬†the Russell 2000’s most recently published trailing P/E at WSJ.com is 34.¬†Shouldn’t one be a bit fearful of trailing P/Es at 34 when forward guidance is hazy in an extraordinary “soft patch” or potential double-dip?
It follows that funds like iShares Russell 2000 (IWM) and iShares Russell 2000 Growth (IWO) may be technically oversold, but they’re hardly¬†bargains. Even when the P/E is closer to 17 — as the case may be for PowerShares Dynamic OTC (PWO) — it may be difficult to for some to purchase¬†high P/E¬†ETFs due to an “oversold technicality.”
Not surprisingly, Bespoke’s “Oversold ETF” List also includes European ETFs from SPDR Euro STOXX 50 (FEZ) to iShares MSCI France (EWQ) to iShares MSCI Austria (EWO). Is fearing the uncertainty surrounding¬†the eurozone’s sovereign debt crisis¬†irrational?¬†Not if you pay attention to ever-increasing LIBOR rates, which has been raising the stakes for inter-bank lending. Note: 3-month LIBOR¬†has ticked up even higher — now¬†.303% –since I¬†discussed its¬†breach above a 200-day trendline on¬†8/16 in “Hazardous LIBOR Trend Requires Shift To Asia Bond ETFs and Asia Country ETFs.”
Is fearing the uncertainty surrounding the U.S. defense budget crazy? Not when failure to reach accord in the so-called “super-committees” could result in extreme cutbacks to the defense and aerospace industry. Powershares Aerospace and Defense (PPA) resides¬†on the “Oversold ETF Table” as well.
Simply stated, it may be useful to see tables of ETFs meeting certain criteria. In fact, traders may want to buy the biggest decliners on relief rallies alone. Nevertheless, investors would want to scrutinize lists for components that present something unique. Perhaps indiscriminate selling may have caused some to toss the proverbial baby out with the bath water.
In truth, it’ll be hard for any bargains to gain much ground in the current environment. Yet if it’s bargains that you seek,here are 2 ETFs that I regard as¬†technically oversold AND fundamentally desirable.
1. iShares MSCI South Korea (EWY). It has already been well established that some of the best stock ETFs in 2011 — as well as 2009 and 2010 — are Asian neighbors to China/Japan. I have discussed the ability for Thailand, Indonesia and Malaysia to rebuff the bearish growl heard round the world.
Yet iShares MSCI South Korea (EWY) has been rocked over the last 10 weeks for a -26% decline. I think there may be a reason to go bargain hunting here.¬†This is a country on track for 4.2% 2011 GDP with full employment. Like all emergers, it is battling inflation. Nevertheless,¬†a P/E of 15.5 is reasonable for a country fund whose largest weighting is in information technology.
2. SPDR S&P Oil and Gas Equipment and Services (XES). Of all the assets on the “Oversold ETF Table,” this one sticks out like a sore thumb. Call it an Arab Spring… call it Middle East tension… but we’re still seeing uprisings in Libya, Syria, other parts of northern Africa as well as the areas surrounding Israel. Crude oil has already taken a very hard hit from the top, and is likely to stabilize near $80 on supply/demand and Middle East concerns alone.
It follows that expertise in assisting drillers, particularly offshore, should continue to boom over time. XES boasts a low P/B of just 1.4, 10% ROE and 3-5 year EPS growth estimate of 14%.
Disclosure Statement: ETF Expert¬†is a web log (‚ÄĚblog‚ÄĚ) that makes the world of ETFs easier to understand. 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. You may review additional ETF Expert disclosure details here.