The Merry-Go-Round Market Is A U.S. Phenomenon

By James Brumley | August 19, 2010 AAA

Is anybody else weary of the sheer volatility from the U.S. stock market? Just this past week, renewed fears of a double-dip recession hijacked reason and level-headedness again, pulling the market down as a result. Actual valuations, present or expected, seem to have little bearing any more. There is a way around it though, and it's one that's apt to be profitable as well.

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The Reason You Feel Seasick
Just to put things in perspective, check out the major (5% or more) moves from peaks to troughs, and back, that we've seen from the SPDR S&P 500 ETF (NYSE:SPY) this year alone.

Date Moves
December 31 - January 19 +3.3% (the uptrend started before 12/31)
January 19 - February 5 -9.2%
February 5 - April 26 +16.8%
April 26 - May 6 -14.0%
May 6 - May 13 +12.1%
May 13 - May 25 -11.3%
May 25 - June 3 +6.4%
June 3 - June 8 -5.8%
June 8 - June 21 +8.2%
June 21 - July 1 -10.7%
July 1 - August 9 +11.9%
August 9 - August 20 -5.7% (and still counting)

That's a whopping 115.4% points worth of total "travel," and what do we have to show for it? A mere year-to-date loss of 3.9%. It would have been slightly less irritating if the market were at least pretty deep in the hole, as it would have at least been trade-worthy. This is just sheer indecision, largely fueled by a hysterics-loving media.

The thing is, we're starting to see a divergence between U.S. equities and the rest of the world's equities. Overseas, foreign stocks are not only more reflective of their underlying companies, but the further-underlying economics are actually supporting sustained growth. (Read about profiting from divergence trades in Divergence: The Trade Most Profitable.)

Foreign Markets, by the Numbers
China's and Japan's economies may be slowing down, but you don't have to look too far past either to find neighbors that are accelerating. Indonesia's economy, for instance, grew by nearly 6% in the first half of 2010. South Korea's grew at a clip of 7.6%. The half-year numbers aren't out yet for Malaysian and Thailand, but their economies grew by 10% and 12% respectively, in the first quarter. Even a number half as strong would still be impressive.

Not surprisingly, U.S.-listed Indonesian stocks rank in the top third of all nationalities when it comes to performance over the last six months. It's not just Indonesian stocks on a roll though. Three of iShares' top six performing ETFS at the end of the first half of the year are foreign ETFs. The iShares Thailand (investable market) Fund (NYSE:THD) is up 19.5% since January, and is still on a roll. The iShares Chile (investable market) Fund (NYSE:ECH) is up 15.7% for the first half of 2010, while the Malaysia Index Fund (NYSE:EWM) is ahead by 15.1%.

See the cause/effect correlation starting to peak through?

To be clear, those three funds aren't among the top six of just iShares' international ETFs - they're the top performers among ALL the iShares ETFs.

Other Overseas Picks of the Litter
While exchange-traded funds are the easy way to take advantage of this growing divergence between the United States' market and the rest if the world's, ADRs may offer an even better risk-versus-reward profile.

The strong numbers above focused on smaller Asian countries. As such, obviously some stocks from those particular countries have made for prime holdings. For instance, South Korean telecom stock KT Corp. (NYSE:KT) is up more than 18% for the year so far, but with a forward-looking P/E of just above 7.0, there's still plenty of room for price appreciation.

No international portfolio would be complete, however, without some South American exposure.

With that in mind, one might look for something that combines growth opportunities with a relatively stable business. Brazil's utility stock CPFL Energia (NYSE:CPL) is one savvy way of doing that.

CPFL improved earnings by 82% on a year-over-year last quarter. The underlying reason, however, is the compelling part of the story. Energy demand in Brazil is soaring, as the country is coming out if its recession in much better shape than the U.S. is. And, while there's always the possibility that a U.S. double-dip could reach that far south, the current divergence trends suggest that's unlikely.

The Bottom Line
In any case, the message is clear - sailing is smoother overseas, even if it's only volatile here for the wrong reasons. (For related reading, take a look at Go International With Foreign Index Funds.)

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