News Analysis date published New: 
Thursday, November 8, 2012 - 06:00
New Date created: 
Thursday, November 8, 2012 - 06:00
New Date last updated: 
Thursday, November 8, 2012 - 06:00

2 Funds That Could Surge Another 20%

Thursday, November 08, 2012 6:00 AM

There's nothing like a visit to a foreign country to give you a sense of how well, or how poorly, that country is doing economically. Speaking with the "man on the street," reading the local newspapers, and getting a feel for how citizens perceive their economic situation usually is much more valuable than a disconnected read of a country's GDP, or a look at price charts and technical patterns of stocks and/or exchange-traded funds (ETFs) pegged to that country's index.

To be certain, the data and charts are critical aspects when considering investing, and especially trading, stocks or funds pegged to the fate of a country. However, there is nothing like having dinner with some well-connected economists and businessmen intimately familiar with the ins and outs of the region to give you a sense of whether the country is investable, or whether it should be avoided.

Last week, I visited Europe's strongest country, Germany. Long known for its national pride, its citizens remain immensely proud of its standing as the European Union's most vibranteconomy. After speaking with several business people, writers and investors, I came away with the distinct impression that German companies are likely to thrive despite the wider EU fiscal woes and in spite of the recession in the region.

Fiscal conditions in Germany are robust when compared with the rest of the EU. The country recently announced that it had cut its 2013 growth forecast to just 1% from 1.6%. That may not seem like a robust economy, but compared with the rest of the ailing EU, it represents a lot of strength. Moreover, many of the country's biggest companies continue to see strong earnings.

One of the best ways to gain German equity market exposure in your trading portfolio is via the iShares MSCI Germany Index (NYSE: EWG). This ETF holds some of the strongest, and most profitable, German-based companies, including industrial giant Siemens (NYSE: SI), health care products behemoth Bayer (XETRA: BAYN.DE), enterprise software firm SAP AG (NYSE: SAP), Mercedes Benz maker Daimler AG (OTC: DDAIF) and financial stalwart Deutsche Bank AG (NYSE: DB).

During the past three months, EWG has surged over 9%. Since its June lows, the fund is up more than 20%. The buying in the space since June is in large part a reflection of the optimism over the likelihood that Germany will support the European Central Bank (ECB) and supply ailing banks and governments in the region the bailout funds needed to avoid massive defaults.

The bottom line here is that the powers that be in the region, including Germany, do not want to see the EU collapse, and if one domino falls, then they all are susceptible. Avoiding that is what the ECB's rescue plan is all about, and that's what the Outright Monetary Transactions (OMT) will likely achieve despite the challenges ahead.

Technically speaking, EWG has formed a bullish cup-and-handle trading pattern, a move that began in March and has continued through October. With the shares now above both the short- and long-term moving averages, we could be on the verge of a technical breakout in the fund.

Action to Take --> Buy EWG at the market price. Set stop-loss at $21. Set initial price target at $27.30 for a potential 20% gain in the 3-4 months.

For traders with a tolerance for a bit more volatility, another good way to play the German market is via the Market Vectors Germany Small-Cap ETF (NYSE: GERJ).

This fund holds smaller companies that do business in Germany, as well as in other European countries. The smaller size of the holdings in GERJ mean these companies are a bit less susceptible to wider EU economic conditions. By being pegged to a greater extent to the German economy, they may well be better positioned for continued growth.

Like EWG, GERJ has done very well since its June low, up almost 20%. And shares are up about 7% during the past three months. I see similar upside in this fund as I do in EWG, and as such, both represent a great way to trade Germany's economic prowess.

Action to Take --> Buy GERJ at the market price. Set stop-loss at $20.09. Set initial price target at $26.20 for a potential 22% gain in 3-4 months.

This article originally appeared on TradingAuthority.com:

2 Funds That Could Surge Another 20% (and They're From Europe)

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.