The Asia Times had a piece describing the potential of a Chinese bubble in their highly inflated stock market. One of the items indicative of speculative behavior has been the tremendous change in daily transaction volume.

It has risen from some $5 billion per day six months ago to some $50 billion per day recently. While that by itself may not be enough of a reason for an upcoming bubble, Michael Shedlock’s deeper analysis called “Stir Fried Stocks” offers some interesting sound bites:

Wanting a “piece of the action”
Opening an account but not knowing what stocks to buy… “I don’t know. I’m still learning.”
Mortgaging homes to buy stocks
Dipping into retirement savings to finance a frenzy of trading known as chao gu, or “stir-frying stocks.”
“We are opening 40 to 50 new accounts a day. Six months ago, it was four to five a day.”
Stock prices are 30 to 40 times earnings
“Earnings growth is very, very strong”
Chinese leaders will prop up prices to avoid turmoil ahead of a key Communist Party meeting in
late 2007 and the Beijing Olympics in 2008.
“We hear that before 2008 the government won’t let prices fall”
“We’re not afraid.”

If that isn’t the same speculative babble I have read about before the crash of 1929, I don’t know what is. If you look at my post from yesterday, you may be able to conclude that this type of behavior may very well be the “Point of Maximum Financial Risk” (Euphoria). Of course, in regards to timing, it is possible that we may stay at this point for a while.

What can you do about it? For one thing, don’t consider investing in the Chinese Market at this point. Track your stop loss points on all of your positions and, most importantly, execute them when those price levels are reached.

From my perspective, this is also not the time to become overly aggressive by restructuring your portfolio just because one of your friends has had a better return than you because he used more aggressive funds. When the pendulum swings again, those top performers will go down the fastest.

I found a very interesting article that was written almost exactly one year ago. The main focus is on a chart, see below, which shows the range of emotions investors go through when holding a fully invested portfolio through a bear market.

It covers the entire spectrum of extremes from the “Point of Maximum Financial Risk” all the way to the opposite, called the “Point of Maximum Financial Opportunity.”

Judging by a number of e-mails I received last week, some readers are still confused about how ETFs work and what their pros and cons are. While many articles have been written on the subject, including one I wrote a few years ago, here’s one I found that may help increase your knowledge.

Among other things, it also talks about how ETFs are created and addresses some of their tax-efficiencies as opposed to mutual funds.

However, I must caution you that you should not hold on to an ETF, or any investment for that matter, for only tax reasons. The money you might save could be more than offset by a trend reversal which has the power to do some severe damage to your portfolio.

A question came up in my advisor practice as to whether REITs are still a good investment given the current market climate.

If you look at the sector section of my latest StatSheet, you’ll notice that all domestic Specialty Real Estate ETFs are listed at the bottom based on their 4-wk performance figures as shown below (double click to enlarge):

My managed account clients currently have no holdings in any of these funds since we sold our positions when our sell stop got triggered on 3/6/2007.

As you can see, all momentum figures are very negative, and, if you follow trends, there is no reason to be involved in any of the above at this time.

However, that does not mean this applies to all Real Estate funds. If you look at the international market place, the picture looks different. The chart below shows a comparison between VNQ and EGLRX, a REIT that invests only outside the U.S.:

You can clearly see the “disconnect” between the domestic and the international market. It appears that the divergence took place right after the one-day meltdown on 2/27/2007 after which the domestic Real Estate market never recovered.

ETFs are not for everybody. I remember an experience from last year when I set up a retired client’s portfolio with several ETF positions along with no load mutual funds.

Even though his holdings were in accordance with our long-term investment approach via trend tacking, the client couldn’t help but watch the minute-by-minute ETF price changes on his favorite financial site—every day. He simply couldn’t control himself and finally asked me to sell the ETFs and replace them with equivalent no load funds.

I was reminded of this when I read a story on the Motley Fool website what Warren Buffett thinks about ETFs. Seems like he has some concerns in that most people may tend to become traders rather than remain investors with a long-term goal in mind.

Additionally, he fears that investors may face pressure from their brokers, who benefit from any kind of trading activity.

The bottom line is that ETFs are a great tool and here to stay, however, they still need to be used appropriately so that they can peacefully co-exist with your long-term goals.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Another notch in the bedpost for the bulls.

Our Trend Tracking Index (TTI) for domestic funds/ETFs now sits +5.57% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +10.03% above its own trend line, as you can see below: