A LOOK AT FOREIGN STOCK ETFS -- EMERGING MARKET ETF IS HOLDING ABOVE ITS MARCH LOW -- FALLING OIL PRICES ARE HURTING BRAZIL AND RUSSIA BUT HELPING TO STABILIZE CHINA AND INDIA -- MEDCO HEALTH SOLUTIONS TURNS UP

A LOOK AT FOREIGN ETFS... One of our readers asked me to take a look at foreign ETFs. So here they are. Chart 1 shows the EAFE iShares (EFA) having lost 23% from their November peak. That puts them in bear market territory. The EFA chart doesn't look much different than the U.S. market. Chart 2 shows the MSCI Emerging Market iShares (EEM) also having lost 23%. The EEM, however, looks a bit stronger than the EFA or the U.S. market in the sense that it is still holding above its March low. When considering emerging market trends, however, it's a good idea to see what the four biggest emerging markets are doing. Some of them have fallen a lot further than others. And a couple have just started to fall. I suspect those divergent trends have something to do with oil.

Chart 1

Chart 2

BRIC ETF HASN'T BROKEN MARCH LOW... Chart 3 shows the Claymore/BNY BRIC ETF (EEB). That ETF measures the performance of the four BRIC countries that are Brazil, Russia, India, and China. The chart looks similar to the Emerging Market iShares in Chart 2. That shouldn't be surprising since the BRIC countries dominate that asset class. The bad news is that the EEB is in bear market territory (with a loss in excess of -20%). The good news is that the BRIC ETF is still holding above its March low. Let's see what the four individual BRIC markets look like.

Chart 3

DIVERGING BRIC TRENDS ... Chart 4 shows the divergent performance of ETFs tied to the four BRIC countries. Since last November, China (FXI) and India (INP) have lost -37% and -36% respectively. By contrast, Brazil (EWZ) and Russia (RSX) have lost only -8% and -11%. Up until mid-May, Brazil and Russia were actually in positive territory for the year while China and India were tumbling. Over the last month, those roles have been reversed. Brazil and Russia are falling, while China and India appear to be stabilizing. I suspect the reason for those diverging performances is the recent change in the price of oil.

Chart 4

FALLING OIL HURTS BRAZIL AND RUSSIA ... I've written before about the fact that rising commodities were benefiting emerging markets that export those commodities. They include Brazil and Russia. Charts 5 and 6 show both ETFs falling sharply since the start of June. Both have fallen below their 200-day moving averages. The Market Vectors Russia ETF in Chart 6 is threatening its February low. The two lines above those charts suggest why they're dropping. The blue line lines are ratios of the Brazil and Russian ETFS divided by their BRIC ETF. Both RS lines started dropping at the start of July. The top line in both charts is the price of crude oil. You can see a close correlation between the lines. It seems clear that the July drop in crude oil (and other commodities) has taken a negative toll on both Brazil and Russian stocks.

Chart 5

Chart 6

FALLING OIL BOOSTS CHINA AND INDIA ... The next two charts show the big drops in the China iShares (FXI) and the iPath MSCI India ETN (INP) since last fall. Both have bounced over the last month. The Chinese ETF is the stronger of the two since it's held over its March low. The relative strength lines below the two charts divide each ETF by the BRIC ETF (EEB). You can see that both RS lines have bounced during July after falling all year. The lowest line on both charts plots the price of oil. You can see the inverse relationship between oil and the two ratios. It seems clear that rising commodity prices (mainly food and fuel) were really hurting the Chinese and Indian markets, while they were helping Brazil and Russia. The recent downturn in crude (and other commodites) is now having the opposite effect. It's hurting Brazil and Russia and is starting to help China and India. Whether those divergent BRIC trends continue will probably depend on how far oil and other commodities drop.

Chart 7

Chart 8

MEDCO HEALTH SOLUTIONS BREAKS OUT ... We've pointed out many times that defensive money is flowing into healthcare stocks. In fact, healthcare was the top sector over the last week and the last month. Because of that, we've been showing several healthcare stocks that are showing relatively strong chart patterns. Here's another one that caught my eye today. Medco Health Solutions (MHS) was the day's top percentage gainer in a rising healthcare group. Its chart pattern shows the stock breaking through initial chart resistance at 49 today. That puts the stock up against the top line in an apparent bullish "symmetrical triangle". [A symmetrical triangle occurs when a stock trades between two converging trendlines]. It's usually a continuation pattern which, in this case, would be bullish. The stock's relative strength line (below chart 9) is already near a record high. I've written many times before that I believe in taking what the market is giving. Right now, the market is giving us some profits in healthcare. And not much else.

Chart 9

FIDELITY SELECT MEDICAL EQUIPMENT FUND ... Two Fidelity Sector Funds that are at the top of the weekly and monthly leader board are in biotech (FBIOX) and Fidelity Select Medical Equipment (FSMEX). I'm showing the latter because it's the only one to actually reach a new record high as shown in Chart 11. Its relative strength line has also been rising since mid-May when the market started to weaken. This healthcare fund has large holdings in stocks like Baxter (BAX), Medtronic (MDT), Alcon (ACL), and Beckton Dickenson (BDX). The biggest holding is Baxter Intl. which also happens to be one of its strongest stocks. The monthly bars in Chart 12 show BAX hitting a new record high after recently exceeding its 2002 high. Its relative strength line is doing the same. [More information on the fund can be found at Fidelity.com].

Chart 10

Chart 11