So how might you protect yourself? For starters, you must recognize that cheap can always get cheaper. You could have purchased the Nasdaq 100 (QQQ) 60% off of its 120 high at a price point of 50 in 2001, yet that would not have prevented further downside of another 60% as QQQ dropped from 50 to 19 over the remainder of the 2000-2002 bear market. Stop-limit loss orders can help one minimize the possibility of cheap turning into a disaster. Similarly, resolving to purchase assets that have established intermediate-term (100-day) and/or long-term (200-day) technical uptrends also increases the probability that you are making a well-reasoned decision.
For instance, Market Vectors Africa
(AFK) has a trailing 12-month P/E of 12. Is it a bargain? Is it less risky than the name itself might otherwise dictate? Perhaps. The current price is not far from where it was a year ago. The price is also above both its 100-day as well as its 200-day moving average. Moreover, the 100-day recently crossed above the 200-day, a phenomenon that many technical analysts believe to be quite bullish. On a P/E of 12 alone, I would not be inclined to consider this exchange-traded tracker. With its recent price movement, however, Id have greater confidence in this funds capital appreciation potential.
In contrast, a number of estimates place the forward P/E for iShares MSCI Brazil (EWZ) at 11. That might be considered a steal at a 33% discount to the S&P 500. Yet from my vantage point, the recent inability of EWZ to hold either its long-term (200-day) trend line and/or its intermediate-term (100-day) trend line are reasons enough to look elsewhere. Efforts to catch a falling knife rarely pan out.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.
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