With the real estate lending bubble bursting in dramatic fashion, stock assets plummeted 40%. Separately, the P/E price tag for the S&P 500 not only reverted to the arithmetic mean, it had dropped into single digits by March of 2009.

Perhaps ironically, even as the stock market’s price clawed back during the 3/2009-4/2011 uptrend, P/Es did not keep up. Corporate profits were so strong for seven consecutive quarters, leaving P/Es for the S&P 500 in a subdued range of 11-13x trailing earnings.

Perma-bears have ignored this reality. Instead, they’ve chosen to focus on what they call “unrealistic corporate expectations.” (They’ve been saying it for several years now.)

Granted, companies may not beat expectations at a 70% clip this earnings season. Obviously, CEOs will guide lower with the extreme economic uncertainty ahead. That said, if the collective guidance for S&P 500 corporations is lowered to a mere 3% growth in profits for 2012… the S&P 500 would need to trade at 1500 by year-end 2012 to revert to a historical P/E average of 15. (Note: The price on the S&P 500 is currently 1160.)

I’m not here to argue that the market is overvalued or undervalued… the stock market is worth exactly what it’s worth on the day you’re staring at it. That said, I am suggesting that perma-bears often use different facts to maintain a permanently pessimistic bias.

Me? I am neither bullish nor bearish. I know that markets can be irrationally spiritless as well as irrationally exuberant. By the same token, I offer a variety of reasons for allocating more or allocating less to riskier market-based securities.

At this moment, I am still weighted more heavily toward income production and cash. Yet I am definitely mindful of the fact that many indicators – P/Es, rolling returns, shorter-term “technicals” — may revert to a historical average; what’s more, when it happens… stock prices should move significantly higher.

Although I touched on P/Es, it may be worth looking at a tendency for prices to revert towards a 200-day trendline. Here, then, are 10 popular ETFs that are more than 10% below a 200-day MA (potentially oversold):

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) that makes the world of ETFseasier 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.

Until recently, however, ETF investors had slim pickings. You had vehicles such as SPDR DB International Gov’t Inflation Protected (WIP) as well as SPDR Barclays International Treasury (BWX). Yet WIP and BWX experienced enormous difficulties during the U.S. subprime disaster; moreover, neither looks fit for consumption in the present-day sovereign debt crisis.

Fortunately, fund families have been introducing non-dollar and non-euro denominated Bond ETFs. For those who wanted emerging market bond yields in appreciating currencies (and yes… that included me), WisdomTree Emerging Market Local Debt (ELD) appeared to be a godsend. And in many ways, WisdomTree Asia Local Debt (ALD) may have seemed even more appealing.

Both ALD and ELD provide an income stream with capital appreciation potential. And at their inception, they were met with enormous enthusiasm. Even today, if safety-seeking were a rational process, investors should be intrigued by governments capable of paying their debts in currencies that, for the most part, are not being devalued by weak monetary/fiscal policies.

Instead, institutional investors have soured on local debt Bond ETFs. Not only have the markets punished shareholders with nearly -10% in depreciation off the highs, but institutional money managers also appear to be running for the hills.

Consider the sobering “stats” from Tuesday’s session, September 27. Block trade “selling on strength” revealed that money managers dumped $200 million of WisdomTree Emerging Market Local Debt (ELD) on 11x the normal volume, erasing 15% of ELD’s assets under management. Similarly, money managers dismissed $220 million of WisdomTree Asia Local Debt (ALD) on 33x normal volume, eradicating 34% of ALD’s total asset base.

33x the normal volume? 34% asset-under-management wipeout? Anyone who believes that contagion fears are approaching containment isn’t paying attention to the exodus from emerging market bonds.

Perhaps ironically, I have not returned to developed world treasuries for years. What’s more, in complete contrast, I continue to embrace dollar-denominated emerging market debt like PowerShares Emerging Debt (PCY) as well as local currency debt (e.g., ALD, ELD). After all, even global recession forecasters would agree that emerging market central banks have ample room to cut rates.

It follows that a significant slowdown in economic growth may benefit emerging market bonds. EM central banks could lower rates, effectively boosting the price on a number of EM Bond ETFs.

Of course, if the entire globe becomes infected by the euro-zone virus, all “bets” would be off. In fact, under that scenario, even gold bugs could get squashed.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) 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.

Indeed, the country boasts the world’s 7th largest economy, a consumption-oriented middle class and a treasure trove of natural resources. What’s more, Brazil figures to see a surge in tourism as well as infrastructure commitment due to the 2014 FIFA World Cup and the 2016 Olympics.

So what in the world is wrong with Brazil ETFs? Year-over-year, they’ve experienced some of the harshest capital depreciation in the exchange-traded universe.

The easy argument identifies the slowdown in Europe and the tightening of fiscal/monetary policy in Brazil’s most important trading partner, China. Others have pointed to the possibility that the rise off the 2008 bear’s bottom may have been “too much too fast.”

However, still others are suggesting a far more pessimistic possibility. Extraordinary foreign investment in recent years may have created unintended consequences, from an artificial boost in assets such as real estate to remarkable appreciation in the value of the “real,” Brazil’s currency. In fact, with the Brazilian ”real” so strong, Brazilian factories have may be losing the global competitiveness that they had enjoyed over the previous decade.

Consider additional signs of weakness. Brazilian industrial production dropped 1.6% in June from the prior month. The yield curve in Brazil is inverted. And in spite of potential inflationary scenarios, leaders surprised the world with a recent cut in target interest rates.

Nevertheless, with a rate of 12%, there’s a flood of money looking for safer returns in the rapid-growing economy. Lowering Brazil’s key rate to 12% may not depreciate the Brazilian real enough to keep foreign investors from seeking out that 12%. This might keep the ”real” high and inhibit manufacturers from effectively competing on the world stage.

Still, do not count Brazil out. This is one of the most dynamic economies in the world with some of the best corporations for growth seekers. When the tide turns for emergers… when risk is genuinely back in vogue… Brazil should benefit handsomely.

You can listen to the ETF Expert Radio Show “LIVE”, via podcast or on your iPod. You can follow me on Twitter @ETFexpert.

Disclosure Statement: ETF Expert is a web log (”blog”) 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.

There are other theories, however. Some believe that — economic warts and all – U.S. stocks may be the best house on the equity block.

For example, Jeremy Siegel, co-founder of WisdomTree and author of Stocks For The Long Run, contends that U.S. stocks are more attractive today than he’s ever seen them. He bases his belief on the fact that, when interest rates are in a low to middle-interest rate range, the average historical P/E is 19. With the S&P 500 trading near 14 (below the 50-year average of 15), U.S. stock assets may be especially enticing.

I’m not sure I “buy” the good professor’s assessment. For one thing, slicing 50 years of data into rate environments of “low-medium” and “medium-high” may only consider 25 years for each category. That’s a narrow window. Meanwhile, if we’re talking about an average P/E of 19 in a span of just 25 years (”low-to-medium” interest rates), the deviation around the mean would be far greater than over a 100-year span. And that makes it even more difficult to be confident in the attractiveness of an entry point.

Nevertheless, there may be something to Spiegel’s theory. A number of Country ETFs sport P/E ratios that are similar to U.S Stock ETFs. And, those countries have “medium-to-high” interest rates today. Following the professor’s logic, the P/Es of these international ETFs are not low enough when compared with U.S. stock ETFs.

Whether it’s about the P/Es, interest rates, both, or a variety of factors, foreign stock ETFs are lagging in 2011. Moreover, the ETFs with the least momentum tend to be rich in natural resources.

If Siegel’s theory has global implications, then the P/E ratios for iShares Brazil (EWZ) and Market Vectors Russia (RSX) are not attractive enough when interest rates are taken into account. Whereas the U.S. has a 3-month of just 0.13%, Brazil’s 3-month is at 12.2% and Russia’s 3-month is at 8.2%.

On the other hand, it’s equally plausible that central bank policy direction is a larger factor than the interest rate categories. If China achieves its aim of reasonable inflation and moderate growth, it will end its rate hiking campaign before too long. Same goes for India. When these events transpire, expect resource-rich ETFs like Brazil and South Africa to be leaders in the emerging market pack once more.

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Translation? Stocks are currently pulling back. However, if corporations refrain from hiring on a large scale going forward, the anticipated sell-off may become a bearish nightmare.

Hedging commentary is one thing. Short-selling and/or a clear unwillingness to buy domestic equities is another. Indeed, you almost get the sense that the short sellers, “wait-n-seers” as well as the dip-buyers have collectively pre-determined that the S&P 500 will hit new lows in 2011.

On the flip side, emerging market small caps appear to have already hit their low point in mid-March. Their slow, steady decline actually began in November of 2010, as central banks around the world raised interest rates to fight inflation.

In other words, U.S. stocks may be fretting the end of the ultra-accommodative QE2 and/or Fed assistance beyond 0% interest rates. Yet small cap emergers are anticipating easier monetary policy as rate hikes come to a close.

How can you tell? Emerging Market Small Cap ETFs have been distancing themselves from their 2011 lows.

Other encouraging signs? The SPDR S&P Emerging Market Small Cap Fund (EWX) reversed its bearish “death cross” in favor of the more bullish “golden cross.” More specifically, the 50-day moving average recently climbed back above the 200-day moving average.

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Then my mind shifted to something else entirely. Specifically, I wondered how many Americans could spell the word, “ethnocentrism.“ It is essentially spelled like it sounds. What’s more, it aptly describes the investing tendencies of many Americans.

In essence, scores of U.S. investors regard the S&P 500 as the star at the center of the financial universe, while foreign stock benchmarks merely exist like planets in orbit. (I’m as guilty as the next… no judgements here. And I lived in Southeast Asia for roughly 4 years!)

Don’t believe it? You may wish to inspect your 401k or brokerage account(s). Although half of the world’s stock market capitalization comes from outside the U.S., many of us only have 0%-20% of foreign stock exposure. (Note: It’s not much different when it comes to advisers. My peers typically recommend 20% or less overseas.)

In truth, we feel more comfortable when we invest in what we know. After all, most of us couldn’t spell Malaysia, let alone identify the country on a map.

That said, emerging market economies are growing 2-3x faster than the U.S. or Europe. It follows that if you want to be more successful in the months and years ahead, you’ll need to lose the ethnocentrism.

Granted, through the prism of 1/1/11-6/3/11, you may have been better off in U.S. ETFs alone. However, Emerging Market ETFs have been recovering from 2011 lows, whereas U.S. ETFs could be heading in the opposite direction.

Here are 3 reasons to consider Emerging Market ETFs right now:

1. Central Banks In Developing Countries Will Soon Shift From Tightening To Neutral. Many an ethnocentric individual has talked about how Japan’s recession adversely impacted U.S. GDP in the first half of 2011. That may be a convenient way of looking at a half-empty American cup.

However, emerging economies like China and India have been deliberately curbing their white hot economies for the past 9 months. Japan’s recession may have helped the cause, making it possible for central banks in emerging Asia to stop the rate hikes sooner. In other words, you may not need to fret the end of QE2 in the U.S. when you’ve got the end of tight monetary policy in emerging Asia. (Consider SPDR S&P China GXC.)

2. Japan’s Need To Recover. In the near-term, the world’s third largest economy will certainly rebuild. Countries like Malaysia (EWM) and South Korea (EWY) benefit tremendously from that need, as they are top-of-the-line providers of materials and services to Japan. In fact, since the earthquake/tsunami date of 3/11/11, EWM and EWY are up 5.3% and 11.5% respectively. The S&P 500 SPDR Trust (SPY)? 0%.

3. Changing Of The Guard in Relative Strength Percentile Rank. On a chart or in a table, one can examine the year-to-date performance spread between Vanguard Emerging Markets (VWO) and the S&P 500 SPDR Trust (SPY). At one point in March, the difference was as wide as 700 basis points. Today, it is down to roughly 300 basis points.

More importantly, VWO is moving in the right direction over the last 3 months. Across the entire ETF universe, SPY has traveled from a relative strength percentile rank of 62 to 47; conversely, VWO has journeyed from 40 to 60.

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On the first day of June, however, worldwide markets hammered stock assets by 1.5%-3%. Mr. Cramer didn’t back-peddle. Not exactly, anyway. He explained that U.S. stocks were still within spitting distance of their highs. And the fact that the precipitous drop came on the same-old news – a slowdown in China, falling U.S. home prices, $100+ per barrel of oil, the end of the Federal Reserve QE2 program — the one-day rout wasn’t reason enough to abandon “best in breed” corporations.

Many recognize that Mr. Cramer can shift from bullishness to bearishness (or vice versa) faster than the speed of sound. On this occasion, however, the animated host came across as rather subdued. Why might this be important? In essence, when Mr. Cramer exhibits less Ozzy Osbourne-like antics… when he isn’t rabidly biting the head off of a miniature foam bear… investors might expect a period of trading range activity.

What does the trading range for U.S stocks look like? On the low side, the S&P 500 has support at 1300. U.S. equities are bolstered by stock fund inflow, easy money Fed policy, the contrarian benefit of fearful advisers as well as reasonable stock valuations. On the higher side, S&P 500 has resistance at 1360. Simply stated, U.S. equities are held back by sovereign debt struggles abroad, political wrangling on debt limits stateside, uneven corporate hiring, double-dipping home prices and waning consumer confidence.

In truth, U.S. stocks have been pretty flat over the last 2 months. You can view the 60-point trading range of less than 5% on a chart, which makes it easy to see the rudderless reality. One might even be inclined to view the drop from the multi-year highs in late April as the start of the next correction. (Note: Review my 5/11/11 commentary, “3 ETF Signs Of A Highly Probable Correction.” )

Even if a U.S. equity correction is in the cards, consider the technical support that exists for buyers to purchase on the dips. The March 2011 low for the S&P 500 is 1256. The year began at 1257. And the 200-day moving average is at 1247. In other words, a correction might take equities down to the 1250 level… a drop of -8.5% from closing highs; yet, a whole heck of lot might need to go wrong to bring about a larger sell-off in U.S. equities.

Here’s another reason why U.S. stocks will probably stay above a 200-day moving average. Emerging market stock ETFs, particularly China ETFs, are rebounding. As the developing nation economies have slowed considerably, the need for fiscal and monetary tightening may come to a quicker conclusion.

Indeed, some may be surprised to learn that, over the last 3 months, prominent Emerging Market ETFs have out-hustled the Vanguard Total U.S. Stock Market (VTI). Whereas VTI has been flat, VWO and SPDR S&P China (GXC) have been appreciating in value.

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Not anymore.

On the last day of May, institutional block seller(s) dumped $150 million worth of ELD on more than 10x the normal trading volume. In a blink a the bull’s eye, 15% of ELD’s assets under management disappeared.

The timing is particularly intriguing. Why now?

Does an influential adviser believe that emerging markets have not yet begun to fight the inflation battle, such that interest rates by central banks will be rising for 6-12 months or longer? Ongoing rate hikes in Latin America and Asia would certainly take the wind out of the foreign income sails; however, currency gains might offset some of the price depreciation. It follows that I don’t believe that the decision to shed ELD came as a result of rate hike fears. 

Might an influential person or persons see a dollar reversal on the horizon? If so, extraordinary gains in the U.S. dollar would certainly harm foreign bonds that are priced in foreign currencies. Still, even if a near-term dollar reversal came about due to ongoing Eurozone troubles, I wouldn’t bank on a long-term strengthening of the buck. Remember, the Fed is likely to introduce ”QE2 Lite,” effectively diminishing long-term desire for U.S. dollars.

Could an active trader have moved to lock in gains at month’s end? Perhaps. Just as some advisers will buy “hot” investments at the end of a month to dress up a portfolio for statement viewing (i.e., “window dressing,”), others will undress the windows to show that they are raising cash reserves in challenging times.

While I can’t possibly know the answer, I am extremely curious. Wisdom Tree Emerging Market Local Debt (ELD) isn’t a trading tool like leveraged stock and commodity vehicles; primarily, ELD offers a non-correlating asset for portfolio diversification. You know… “seeking alpha.”

In my estimation, ELD is worthy of holding for now. It’s less than 1% off 52-week highs and well-above technical moving averages.

Granted, the dollar could strengthen. Emerging market inflation could quicken. And the 4.4% achieved in the first 5 months of 2011 could erode. Nevertheless, the 5% annualized income stream (delivered monthly) is plenty desirable for those that have enough exposure to stocks and commodities.

Keep in mind, the average yield to maturity in ELD is 6 years. As long as a fund like iShares Barclays 3-7 Treasury Bond (IEI) yields a paltry 2%, one should expect investor demand for higher total return. ELD provides higher total return through higher interest payments as well as the potential for currency-driven capital appreciation.

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Of course, the emergers are not without their concerns. They face more vexing inflation than developed economies. They’re more dependent on the natural resources they can or cannot export. And political stability for emerging countries may be a bit of an oxymoron.

The last 6 months have been somewhat troubling for the emerging world. The iShares MSCI Emerging Market Fund (EEM) is flat whereas developed world proxies like the iShares Global 100 (IOO) and the S&P 500 SPDR Trust (SPY) have appreciated 6% and 11% respectively. Those are rather dramatic differences. 

Is the S&P 500 getting ahead of itself, then? Even at current prices, the S&P’s anticipated earnings of $100 suggests a Forward P/E of 13. Current economic and geopolitical risks notwithstanding, large-caps with a P/E of 13 are hardly overvalued. What’s more, a large majority of S&P 500 corporations have strong footholds in the very emerging markets where consumers will be ramping up their spending.

So what gives? Why are foreign companies in the MSCI Emerging Market Index collectively struggling to stay above a long-term trendline? Note: iShares MSCI Emerging (EEM) is a mere 0.2% above a 200-day MA. It hasn’t been below the 200-day in 9 months!

Some of the writing may have already been on the “Wall.” In my May 11 commentary, “3 ETF Signs Warn Investors Of A Highly Probable Correction,” I pointed to the iShares BRIC Fund (BKF) having already broken down. When the largest portion of the emerging market pie — Brazil, India, Russia and China – struggles mightily, how surprised should we be that the broader MSCI Emerging Market Index follows suit?

I discount the possibility that the U.S., with or without a self-sustaining economy post QE-2, can single-handedly keep the developing world from correcting; the idea of decoupling has always been mythical. Either emerging equities will make an abrupt turnaround, or they will take U.S. stocks on a “give-us-reason-to-keep-believing” pullback. (I anticipate the latter.)

How troubling is the current data? The Emerging Market “Cross-Under” Club has expanded since I last wrote about it. Here are the prickly particulars:

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In spite of apparent weakness, however, the glass can hardly be considered half-empty. The SPDR Dividend Fund (SDY) is only 1% off 52-week highs. Even the SPDR S&P 500 Trust (SPY) is within 3% of yet another multi-year peak. 

Still, a variety of signs of derailment continue to vex, including: (1) Bond ETF prices nearing fresh highs, (2) Defensive Sector ETFs from health care to staples slamming the “cyclicals,” (3) Small-cap stocks pulling back more than large-caps, (4) world stocks pulling back more than U.S. stocks and (5) a “total commodity” correction.

The fact that commodities have collectively corrected as much as 10% intra-day isn’t a problem in and of itself. The amount of money pouring into commodity positions as well as the remarkable price appreciation over the last 6 months makes the correction “overdue.” In fact, iPath Total Commodity (DJP) is still up roughly 7.5% in 6 months… and that’s AFTER the corrective activity.

Still, there’s a “disconnect” between commodity gains and the Foreign Stock ETFs that have benefited from increased commodity demand in the past. In fact, resource-rich areas from South Africa (EZA) to Brazil (EWZ) are flat to down over the last 6 months.

So why has the commodity bull failed to benefit resource-rich country ETFs over the last 6 months? Commodity price gains are largely the result of a weak dollar and a speculative public, rather than robust economic demand from around the world.

To the extent this is true, one shouldn’t put his/her full faith in the temporary resilience of the developed markets. Middle-of-the-road risk via preferred shares (PFF) and dividends (SDY) will be safer than hoping-n-praying for Developed Market Stock ETFs to keep “hanging in there.”

When will a genuine increase in demand for commodities occur? It’ll probably take place when China nears the end of its fiscal and monetary tightening; that is, when China goes neutral, you’ll want to return to Emerging Market ETFs for your capital appreciation.

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