Try these international ETFs

The broad market wrapped up the week
with a second straight day of laudable gains
last Friday, enabling the Nasdaq to fully recover its January 20 loss. Both the
Nasdaq Composite
(
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PowerRating) and Dow Jones Industrials
(
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while the S&P 500
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PowerRating) gained 0.8%. Small and mid-cap stocks lagged a bit,
but the Russell 2000 and S&P 400 indices each still tacked on another 0.5% and
finished the week at new record highs. It was a choppy and erratic week that was
challenging for most traders, but the Nasdaq nevertheless advanced 2.5%. Gains
in the small-cap Russell 2000 were even more impressive, as the index surged
3.9% higher. Both the mid-cap S&P 400 and Dow Jones Industrials gained 2.2%,
while the S&P 500 rallied 1.8%.

Total volume in the NYSE declined by 1% last Friday, while
volume in the Nasdaq was 4% lighter than the previous day’s level. The drop in
turnover prevented the S&P and Nasdaq from registering another “accumulation
day,” but turnover still came in well above average levels on both exchanges.
Market internals were positive, but not by a wide margin. Advancing volume led
declining volume by only 1.8 to 1 in the NYSE and 1.7 to 1 in the Nasdaq. On a
day of strong gains, advancing volume should at least double declining
volume in order to confirm the bullish market action.

Since the beginning of January, Chinese stocks and ETFs have
shown great relative strength to the U.S. markets. On the “down” days in the S&P
and Nasdaq, the Chinese sector was mostly sideways, then rallied immediately on
any bounce in the U.S. markets. We had previously pointed out the relative
strength in FXI (iShares Xinhua China 25 Index) several times this month.
Looking at its daily chart, notice how the index never fell below its 10-day
moving average when the S&P and Nasdaq dropped sharply on January 20. After
several subsequent days of consolidation near the high, FXI blasted off to close
at a fresh all-time high last Friday. The move was confirmed by volume that was
more than 3 times its 50-day average level:

PGJ (PowerShares China Fund), which we have been long since
January 19, has also been showing similar relative strength and broke out to a
new high on Friday. The prior base of consolidation should now act as the new
support level, so we will be raising our trailing stop to maximize profit and
protect gains along the way. This is illustrated on the chart below:

CHN (China Fund) is technically not an ETF, but is a
closed-end investment fund that trades like a stock. Unlike FXI and PGJ, CHN is
well below its highs, but is basing out nicely on its weekly chart and appears
poised for another leg higher in the intermediate-term. FXI, PGJ, and CHN are
all likely to continue trending higher in the intermediate and long-term,
although short-term corrections along the way are inevitable.

If you only look at the broad market’s absolute performance
this month, the actual percentage gains are impressive. But the reality is that
it was a challenging month for short-term traders. The start of quarterly
earnings season caused many strong sectors and stocks to show weakness, while
those that were showing relative weakness began to reverse and show strength.
Furthermore, strong price divergence between the small and large-cap stocks
created indecisive action that made it challenging to stay with winning
positions for more than a few days, lest they reverted to break-even or losing
trades.

Looking forward, one way to prevent yourself from getting
“chopped up” is to focus on trading international ETFs that have been trading
independently of the U.S. markets. The iShares family of ETFs has a wide
selection of international ETFs that you may want to check out. The complete
list is available on
the iShares web
site. Even better, you may want to remain largely positioned in cash until
some of these mixed signals and market divergence begins to fade.

Open ETF positions: