With most markets tumbling, which stock or ETF should traders consider?

WHICH came first - the chicken or the egg? Do good fundamentals lead to bullish prices or will bullish prices lead to better fundamentals?

When traders expect a company to do well, they price in their expectations through the buying of the company’s shares, thereby driving up the stock price.

When a company is doing well, traders are convinced by fundamental data and will then proceed to buy the shares of the company.

There are no concrete rules by which situation comes first. But what we can conclude from this is that we don’t know everything, and we need a good indicator such as technical analysis to tell us what market participants are expecting.

Pairing fundamentals with technical analysis

Instead of looking at individual stocks, traders can consider diversification through the taking of positions in exchange-traded funds (ETFs).

No one likes to make a trade and be in a position of loss the very next moment of buying a stock. By pairing fundamentals with technical analysis, traders can make their money work harder and minimise the opportunity cost of time.

Bird’s eye view of various markets

Let’s look at various gross domestic product (GDP) data and then do a simple technical analysis to see which markets are ready for us.

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With reference to GDP data, we can have a general idea of whether a country’s economy is doing well.

• United States: GDP contracted at an annualised rate of 1.6 per cent in Q1 2022, slightly worse than the expected -1.5 per cent.
• Euro zone: GDP in the Euro area expanded by 0.6 per cent in Q1 2022.
• China: GDP expanded by 1.3 per cent on a quarterly basis in Q1 2022. The government is also supporting the economy with stimulus and has an optimistic view for its economy.
• Singapore: GDP expanded by 0.7 per cent in Q1 2022.

Market participants’ view

Comparing the ETF charts of US (SPY), Euro (VGK), China (MCHI) and Singapore (ES3), we see that market participants are of the view that China is picking up.

Using exponential moving averages of periods 20 and 50, there is a crossover on the chart of MCHI and the price has formed a higher high and a higher low. This indicates that the MCHI is on an uptrend.

The turn came sometime back when the RSI (Relative Strength Index) divergence presented itself, followed by a confirmation with the crossover, and then a higher high and a higher low.

As traders who time the market, the market presented 3 opportunities to make an entry. For those trading stocks with the top down approach, you could zoom into the stocks within the country to find potential candidates.

Key takeaway

Knowledge is power. With the knowledge that China is stronger than the other 3 markets, short-term traders can wait for their system’s setup on China-related ETFs or stocks to gain an edge over other traders.

The writer is assistant manager, CFD Dealing, Phillip Securities.