The premise of this post is simple. Fundamentals tell you “What?” and “Why?” Technicals tell you “When?” Your risk-management plan tells you “How Much?” You can make your investment bets on price alone, but that’s asking for trouble. You really should understand what you’re betting on, and that means digging into the fund’s holdings. But I’m going to assume you can do your own fundamentals (by relying on a site like Morningstar to pull the info). So, without justifying my own choices, I’m going to assume you’ll make your own (which might be the same, or not). But of the very similar pair, I strongly prefer PCY over EMB for being its seeming to be the purer play on foreign sovereigns and, hopefully, the better diversifier against domestic sovereigns, even though that isn’t what the 1-year correlations say at site like http://www.sectorspdr.com/correlation/data, where EMB vs. PCY = 0.99 and TLT vs. EMB vs. PCY = 0.41, 0.45. But I’m going to trust that portfolios with significant differences will behave differently and go with PCY. (Besides, its lower share price makes the risk-management task easier.) If “What?” has been decide, the next task is to decide “When?” On the basis of its chart, PCY has run up and is way past a good entry point. http://finance.yahoo.com/echarts?s=PCY+Interactive#symbol=pc... Or again, http://finance.yahoo.com/echarts?s=PCY+Interactive#symbol=pc... If trendline channels are drawn above and below prices from mid-Jul last year to mid-December, it can be seen that PCY closed Friday near the top of the channel after a very long run up. Now’s not the time to be getting in long. But a quick short might work. That’s the trade that would have to be justified fundamentally. “Why were PCY’s holdings bid up, and what’s it going to take to reverse that?” Here’s a partial answer. Plot PCY against the US dollar. http://finance.yahoo.com/echarts?s=PCY+Interactive#symbol=pc...BINGO! We have a winner. To bet on PCY is to bet against the US dollar. That’s the underlying trade, and that trade could be expressed in a lot of ways: directly, by shorting the US dollar; inversely, by going long foreign sovereigns, etc., etc. In short (no pun intended), there’s lot of ways to do the same, fundamentally-motivated trade, and keeping oneself out of trouble is going to depend on the same fundamental work required to make a few bucks off the fact that the Federal Reserve is hell-bent on depreciating the currency under the stupid and mistaken assumption that a cheaper dollar will be good for the exporting sector of the economy and will allow the US to grow its way out of deficits and debts. Well, a funny thing happened while that plan was being implemented. All of the other central bankers of the world are pushing back on the inflation the Fed would like to export to them (through its trashing its own currency), and they have all cranked up their printing presses in equal measure, thus ensuring the embeggarment of everyone. “Yikes”, as the Mogombo Guru would say. “We’re all freaking doomed, and buying gold for a hedge is the only solution.” But, opps, aren’t China and India already doing that by the ton with the foreign reserves they hold in US dollars? And I’ll bet you thought that ‘chartists ‘ were just picture-drawing idiots who couldn’t think their way through what is essentially a macro-economic problem, no matter that the manner in which the trade is ultimately implemented might come down to squiggly lines on a price-volume time-series, and a time-frame as short as a couple of days. I don’t know whether I’m going to put that trade on Monday morning, or which on which market side, but I do know “How much?” If I do the trade at IB (where I would execute), opening-positions have to be a round lot, meaning, it’s going to cost me at least $3k to put that trade on. But ‘exposure’ isn’t ‘risk’. ‘Risk’ is how much I’ll lose if I’m wrong, assuming my stop gets hits close to its price, and setting that properly is going to take chart work. I've got homework to do. Have a good weekend. Charlie
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