Markets This Week |
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| In This Issue: Investment Idea - Currency Diversification New at InvestWELL Financial Investment Quiz Market Highlights S&P 500 Chart TSX Chart Behavioral Finance Indicators Answer to the Question of the Week Investment Idea - Currency: Diversification Q: Is it a good idea to buy international mutual funds in foreign currencies? A: Yes. Diversification by currencies is a really good idea if you plan on holding a mutual fund for a long time. In fact, many institutional investors use a 50/50 breakdown. The first 50% is the predictable local currency. The second 50% gives one a chance to benefit from risk reduction due to diversification. In the short run, a single currency effect on portfolio returns could be quite strong (both negative and positive). In the long run, currency movements tend to offset each other, giving rise to benefits of risk reduction.  New at InvestWELL Financial We want to build a website with resources that help people to invest well. Please let us know if there are any features you would like to add to our/your website. We have recently added the following:
Investment Quiz Q: Let us assume you are an American investor who buys a U.K. index fund based on British pounds. Over the given period, the U.K. index fund goes up by 12% and the British pound appreciates 5% vis-a-vis the US dollar. What is your rate of return in US dollars? a) - 17% b) - 7% c) 7% d) 17.6% Answer at the bottom of this document here Market Highlights Jan 21 - 28
Chart 1. S&P 500 10 Years 
Last 10 days
Charts courtesy of Stockcharts.com
Chart 2. TSX Canada 10 Years 
Last 10 days
Charts courtesy ofStockcharts.com
Behavioral Finance Indicators According to our contrary indicators, the equities will likely decline in February. Following a market correction in October 2005, equities appeared to form a top in the middle of January 2006 (Chart 3). Advancing/Declining Ratio (Chart 4). The ratio of advancing/declining stocks often indicates if movements of stock market prices are broadly based or supported only by a limited number of stocks. The broadly based movements indicate strength while limited participation may indicate potential weakness. The current situation resembles the divergence between prices and advancing/declining ratio in August last year, which was subsequently followed by a decline. AAII Sentiment (Chart 5) The AAII(American Association of Individual Investors) sentiment indicator measures how small individual investors feel about the market (i.e., bullish = optimistic, bearish = pessimistic, or neutral). Not surprisingly, when a large majority of small and usually inexperienced investors have a particular feeling about the market, the opposite usually happens. At the start of 2006, the majority of individual investors were very bullish, which signalled a near-term correction in the markets. Put/Call Ratio (Chart 6) Instead of asking less sophisticated investors how they feel about the markets, we can simply observe how they invest. The put/call option ratio is one of the most reliable contrary indicators of the behavior of small investors. The buyers of put options think that the market will go down, while the buyers of call options think it will go up. Hence, a high put/call ratio indicates there is a lot of pessimism in the market and, therefore, there is good potential for an upward move. In January 2006, the put/call ratio was very low, which in combination with other contrary indicators, signalled that the market was due for a decline. Chart 3. S&P 500 - 1 Year 
Chart courtesy ofStockcharts.com Chart 4. New York Advancing/Declining 
Chart courtesy ofStockcharts.com Chart 5. AAII 
Chart provided courtesy of DecisionPoint.com Chart 6. Total Put/Call Ratio 
Chart courtesy of Stockcharts.com
Answer to the Investment Quiz D is correct. You made money twice. First the U.K. index went up, then the currency of the index is translated back to US dollars (which decline vis-a-vis the British pound). The exact calculation is: (1.12 * 1.05) - 1 = 17.6%
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