Sunday, December 20, 2009

PIE in the sky investing

I happened upon an odd ETF this evening -- the PowerShares DWA Emerging Markets Technical Leaders Portfolio, ticker PIE.

the fund has some formula for buying stocks that 'exhibit strong relative strength' (issues that have already gone up, in other words) and every few months they change the holdings.

the whole notion that you can model and quantify technical analysis is absurd to begin with, so it is no surprise that this PIE has underperformed the benchmark EEM by over 30% since its inception about two years ago:

now you might look at that chart and say that all that decline was during the bear market and the ratio has gone sideways since the Big Rally started in March. that's right, but it is also precisely the point I am trying to drive home here. PIE has barely been able to hold its own in an extremely strong market, and my hunch is that it will resume its underperformance when this Bubblet of '09 inevitably gives way to a secondary deflation.

if you are looking to bet against emerging markets, you could well get better returns shorting PIE than EEM (or similar). after all, the PIE model has already picked out 100 of the most overextended stocks in the emerging segment of the market!