For example, many who understand that emerging markets are volatile will shrug off a 20% loss as temporary.
Lydon says they are right to a point, but when declines reach 50% an investment has to double in value just to break even.
Moving Averages
Lydon also watches an ETF’s 200-day average to see if the price declines are temporary or if they show a long-term trend by breaking below a key support level. A sustained fall below the average often means there’s a more fundamental problem.
IShares FTSE/Xinhua, for example, hasn’t dipped below the 200-day average, but it has dropped more than 8% off its high, so it would be a sell. The firm buys when an ETF stays above the 50-day average and is rising.
IShares MSCI Brazil has dropped about 5.5%, but it hasn’t dropped below the 50-day average yet. That puts it on the watch list, Lydon says.
Global Trends Investments, with $70 million under management, has model portfolios, primarily focused on ETFs. The firm’s model growth portfolio has gone to about 55% cash over the past several weeks, Lydon says.
Over the past 12 months (through Oct. 31) the portfolio has returned 24.8%, against 12.8% for the S&P 500.
The portfolio’s heaviest weight is in WisdomTree Pacific Ex-Japan Dividend (DND). It hit a new high of 94.17 on Oct. 31.