It’s early. The results are open to revision and interpretation. And one month doesn’t make an investible trend anymore than a single swallow makes a spring.

But have you noticed? In the last month emerging stock markets such as China and Brazil have outperformed the U.S. market.

And that’s an absolute turnaround from results in 2010 and for most of 2011. Does it mean that we’re about to reverse the pattern that’s held for more than a year and see emerging markets start to outperform developed markets? Well, sort of. The picture right now shows that the outperformance is limited to some emerging markets and even in those markets, so far, the outperformance is spotty.

But I do think there’s the beginning of a trend here that your portfolio needs to respect. And since it’s so early, you need to pay attention to what kind of stocks in these emerging markets investors are willing to buy right now.

Here’s the data.

For the U.S. markets–for 2010 the Standard & Poor’s 500 stock index was up 15.02%. For 2011 to date, as of November 15, the S&P 500 was up 1.65%. In the last three months it gained 5.05% and for the last month 2.85%.

For Brazil—for 2010 the iShares MSCI Brazil Index ETF (EWZ) was up 7.69%. For 2011 to date as of November 15, it was down 19.54%. In the last three months the loss was a more modest 2.80% and in the last month the index climbed 4.35%.

Yep, after trailing for 2010. After getting killed in 2011 to date. After trailing badly over the last three months. In the last month the Brazil index beat the U.S. market.

China shows the same pattern—with some important wrinkles. Read more

Should you go with the mo?

You know, momentum. The tendency of stocks that have been going up to keep going up (until they don’t, of course.) It’s a successful investment strategy built on the observation that stocks are the only thing that people want to buy more of as they get more expensive.

From the October 3 low through October 27, the Standard & Poor’s Stock Index was up almost 17%%. That’s enough to put thoughts of 2009 in anyone’s head. From the March low that year the S&P 500 rocketed ahead 13% in just about two weeks—and from there it had almost another 1,000 points to go before it topped out in April 28, 2011.

On the other hand, going with the Moe is one thing but nobody wants to be Curley or Shemp. The rally from the August 19 bottom to the August 30 high took the S&P 500 up 10%–but it wasn’t followed by another two years of roaring rally. Instead stocks reversed and by October 3 they had tumbled to a level below where they were on August 19. If you’d bought on August 30 after that 10% move upwards, you would have been left looking at a 9% loss by October 3.

So should you go with the mo? Should you hold positions that have rallied almost 17% or more in a little more than three weeks because momentum will take them higher? Should you buy in now if you’ve been sitting on the sidelines because you don’t want to miss out? Should you be taking profits and trimming positions to protect your gains from a potential downturn?

I’d love to be able to offer you some magic formula—“The inverse Mondavi function says this rally is going to 1364.3 on November 8—or astounding piece of fundamental wisdom—Comparing the multiples of the current market to all markets stretching back to 1843, shows that stocks will climb another 17%.

But I think the current market is best described as poised. The news flow can break either way, depending on what “solution” comes out of Europe in the next two weeks (when we have all the details we don’t have today.) Fundamentals can go either way with growth in Europe certain to slow but growth in the U.S. and Chinese economies set to come in either above or below the expectations built into stock prices right now. Technically, the charts show a market that may have broken through some tough ceiling levels where it’s still too soon to say if the trend will push through that resistance or falter and fall back from yesterday’s levels.

So what’s an investor to do? Read more

Plotting the bottom for emerging market stocks

So where’s the bottom in emerging markets stocks? Or if picking the absolute bottom is too hard (and it is most of the time) when is enough risk out of these stocks to justify some serious bargain hunting?

Emerging market stocks have had the “emerging” beaten out of them in the last month. Brazil’s Bovespa index is down 7.8% from the April 5 local high to the close on May 6. India’s Sensex 30 index is down 6% from its April 4 local high to the close on May 6. China’s Shanghai Composite index is down 6.3% from its local high on April 18 to the close on May 6.

But this recent drop is just an accelerated version of the decline that most of these markets have suffered since they peaked back in the first half of November. From those November highs the Bovespa is down 10.4%; the Sensex is down 11.2%, and the Shanghai Composite is down 9.0%.

Since the beginning of the year I’ve been saying that the U.S. market will be the best performing stock market in the world in the first half of 2011. And it has been with the Standard & Poor’s 500 index up 5.3% even after the carnage of the last week.

But I’ve also been saying that investors should rotate into emerging market stocks, beginning slowly in May or so, because they would outperform in the second half. On current performance you’re entitled to ask “Oh, yeah? When?”

In the last few weeks I’ve been writing that “May or so” should definitely emphasize the “or so.” Today’s post is my attempt to explain why the timetable for rotating into emerging markets has slipped but remains fundamentally intact. And to give you some concrete guidelines for planning your rotation into emerging market stocks.

First, a quick summary of everything that was going to fall into place to make emerging markets outperform. Read more

Hope you like challenges.

For months I’ve argued that for the United States would be the best performing stock market in the world for the first half of 2011. But that investors shouldn’t get too comfortable with their portfolio allocations because the second half of 2011 looked much rockier for the U.S. and other developed stock markets. Sometime in the spring, I said, investors would want to start shifting the weighting in their portfolios to add more exposure to emerging stock markets.

And in my April 7 post http://jubakpicks.com/2011/04/08/now-its-the-turn-of-worlds-developed-markets-to-be-riskier-for-investors/ I wrote that I thought the time had arrived to start making that re-allocation in investors’ portfolios.

I call this challenge No. 1. It’s not easy to go through an existing portfolio, cull the stocks that you want to sell so that create cash for new investments, and then pick new stocks that you’d like to overweight.

But then there’s challenge No. 2. Read more

You can circle this week on your calendar.

For the last six months the world’s emerging stock markets have been riskier than their developed market peers.

For the next six months—and perhaps more—the world’s developed markets carry greater risk.

And, in my opinion, you ought to start weighting your portfolio to reflect that shift in risk.

Why mark this shift down to this week in particular?

The interest rate increase from the European Central Bank on Thursday, April 7, wasn’t much—just a move to a 1.25% benchmark rate from the historic low at 1%–but it does mark the beginning of a cycle of interest rate increases in the big developed economies of the European Union, the United Kingdom, and the United States. Central banks in all three of these economies are about to embark on a cycle of interest rate increases that will stretch well into 2012.

The European Central Bank, the Bank of England, and the U.S. Federal Reserve are all looking to slow rising inflation—although with different degrees of urgency and different timetables. To fight inflation the banks will raise interest rates, slow or reverse growth in money supply, and lower economic growth rates.

Slower growth, tighter money, and higher interest rates have historically not done good things for stock prices. At the least they act as a drag on any potential rally.

Six months ago it was the emerging economies of Brazil, China, India, Indonesia, Turkey and more that were looking at the beginning of a cycle of multiple interest rate increases, policy moves to restrict growth in money supply, and lower growth rates. Those cycles of interest rate increases aren’t over, but in some countries I can see the end of the cycle within a quarter or two. Read more