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My System Signals a “Sell” and a “Buy” in Emerging Markets
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It’s time to “sell” a portfolio holding that has outperformed the market and add a security that looks ready to take off, according to my market-beating, “ROC” system.
I believe that systems take the emotion out of trading, and that is why I follow them. System rules are developed in advance based on logic and back tested so we can be sure the logic is sound. Instead of letting headlines determine when I trade, by following rules, I’ve seen double-digit returns in bull and bear markets.
The logic I start with is that you should buy stocks and ETFs that are going up and sell them when they are going down. I know that sounds glib, but there are ways to define “going up” and “going down” with some simple math.
There are a number of finance professors who use what they call momentum to do that. They’ve shown that buying the stocks with the strongest momentum and selling when momentum slows outperforms the market over time.
As traders, we define momentum in terms of relative strength (RS). The stocks or ETFs with the most momentum will have the highest RS. There are a number of different ways to define RS, including proprietary systems used by Investor’s Business Daily and Value Line. But I think the simplest way is to use a 26-week rate of change (ROC) calculation. With this system, we buy the ETFs that have the highest ROC and sell when ROC falls.
All buys come after sells, and this week, we are selling one of the positions we have held since we started monitoring this portfolio. iShares MSCI Philippines (NYSE: EPHE) is being sold after performing exactly like a high RS holding should. EPHE has delivered a market-beating gain of 10.81% since being added to the portfolio on May 25. That was better than the S&P 500, which gained 6.85% over that time, and the iShares MSCI Emerging Markets ETF (NYSE: EEM), which gained 8.64%.
EPHE is still trading near its 52-week high, but the RS has collapsed in the past two weeks, a signal that there are better trading opportunities available.
In the chart below, I’ve converted RS into a MACD-style indicator called the Momentum of Comparative Strength (MoCS). The indicator fell below its moving average only two weeks ago, and has fallen more than 40% in that time. Breakdowns in MoCS often come right before big price declines.
After selling EPHE, the system is signaling a buy in iShares MSCI Turkey (NYSE: TUR).
This chart shows a strong MoCS that is moving higher and is above the moving average. Price is testing support and MoCS indicates that support should hold. TUR is a volatile ETF and can move very quickly.
The Organization for Economic Co-operation and Development (OECD) expects Turkey to enjoy economic growth of 3.3% this year and 4.6% next year with moderate inflation and unemployment. While growing faster than many other economies, Turkey’s stock market is trading at a low price-to-earnings (P/E) ratio of 8. The P/E ratio on the S&P 500 is about 13, and EEM has a P/E ratio of 10. TUR is a bargain with high RS.
Recommended Trade Setup:
– Sell EPHE at market price
– Buy TUR at market price
– No stops or targets are used with this system, I’ll keep you updated.
The sale of EPHE and purchase of TUR are the only changes to my 26-week ROC system this week. After that, the portfolio will hold the following ETFs:
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Dr. Melvin Pasternak’s Trades & Updates
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| Company (symbol) |
Trade Type |
Buy/Sell Date |
Buy/Sell Price |
Stop-Loss |
Current Price |
Total Return |
| SPDR High Yield Bond ETF (NYSE: JNK) |
Long |
01/30/12 |
$39.94 |
$34.98 |
$39.75 |
-0.5% |
| Apple (NASDAQ: AAPL) |
Long |
03/26/12 |
$607.32 |
$524.89 |
$621.70 |
+6.7% |
| LinkedIn (NYSE: LNKD) |
Short |
05/21/12 |
$96.28 |
$121.11 |
$104.92 |
-5.3% |
| Currency Shares Euro Trust (NYSE: FXE) |
Short |
06/04/12 |
$124.08 |
$127.51 |
$122.21 |
+1.2% |
| The Hershey Company (NYSE: HSY) |
Long |
07/02/12 |
$71.04 |
$64.89 |
$72.23 |
+1.2% |
| Rocky Mountain Chocolate Factory (Nasdaq: RMCF) |
Long |
08/13/12 |
$12.98 |
$10.69 |
$13.03 |
+0.4% |
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View all closed trades here. Stock prices in this issue are as of the close of trading on August 17.
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SPDR Barclays Capital High Yield Bond ETF (NYSE: JNK) zig-zagged during the week, but closed down. The fund is currently trading just above support, marked by the 20-week moving average, at the middle Bollinger band. Daily RSI is above the key 50-juncture and rising. I’m currently about breakeven on the trade. My stop-loss of $34.98 and target of $48.01 remain.
Apple (Nasdaq: AAPL) rose over the the week. News that the company plans to release a cable-TV enabled “set top box” that will allow simultaneous recording and on-demand viewing helped bolster the stock.Shares are currently sitting just below the upper Bollinger band, representing resistance. Daily RSI is nearly touching the overbought 70-level; however, strong stocks can become and stay overbought for long periods. I’m so far up nearly 7% on the trade. My stop-loss of $524.89 and target hold.
LinkedIn (NYSE: LNKD) declined gradually over the week. The stock is currently trading just above support, marked by the intersection of the 50-day moving average and middle Bollinger band, represented by the 20-day moving average; both intersect around $103. Daily RSI is toying with the key 50-juncture. Daily MACD is on a “sell” signal. My stop-loss of $121.11 and target of $71.09 remain.
Currency Shares Euro Trust (NYSE: FXE) dropped Wednesday, but recovered Thursday after German Chancellor Angela Merkel restated her commitment to do what’s needed to keep the Euro countries under one currency. The fund is currently sitting between support, marked by the middle Bollinger band at the 20-day moving average and resistance marked by the downward sloping 50-day moving average. Daily RSI is just above the key 50-juncture. I’m currently up about 1% on the trade. My stop-loss of $127.51 and target of $117.53 hold.
The Hershey Company (NYSE: HSY) hit a new 52-week high Tuesday, at $73.16, but later retreated following news that Hershey’s chocolate syrup products’ nutritional claims don’t meet FDA regulatory guidelines. The stock is currently trading between the middle Bollinger band, marked by the 20-day moving average, and the upper Bollinger band. Daily RSI is just above the key 50-juncture. Daily MACD is on a weak “buy” signal. I’m so far ahead 1.2% on the trade. My stop-loss of $64.89 and target of $79.50 remain.
Rocky Mountain Chocolate Factory (Nasdaq: RMCF) opened trading on Monday by gapping up nearly a dollar, to $12.98. Shares held slightly above this level the remainder of the week. The stock is currently trading slightly below resistance, marked by the upper Bollinger band. Daily RSI is just below the overbought 70-level. Daily MACD in on a strong “buy” signal. My stop-loss of $10.69 and target of $19.95 hold.
Graphic Packaging Holding Company (NYSE: GPK) approached, but didn’t hit my buy-on-stop order price of $5.91, good until August 17th. As a result, I did not take a position in the stock. The trade is now cancelled.
Dean Foods (NYSE: DF) has not yet hit my sell-on-stop order of $11.53. As a result, I haven’t yet entered the trade.
Thanks for reading the latest update on my open trading positions.
– Dr. Melvin Pasternak
Co-Editor, Trade of the Week
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Disclosure: None.
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