(Vietstock) – Vietstock is holding an International Seminar on Technical Analysis with the subject “Using Technical Analysis to Asset Management”. The lecturer is Gregory Morris - Sr. Vice President and the Chief Technical Analyst for Stadion Money Management, Inc. (formerly PMFM, Inc.). Stadion is now utilizing a technical rules-based model to oversee the management of over $3.5 Billion in assets in two mutual funds, separate accounts, and 401k plans. The Seminar is held on May 15th, 2010 in HCMC and May 16th, 2010 in Hanoi, Vietnam.
On the occasion, Mr Morrris wrote an article about “What and How Should Vietnamese Investors Study to Learn about the Vietnam Markets”. It is our pleasure to introduce to all of you.
What and How Should Vietnamese Investors Study to Learn about the Vietnam Markets?
INTRODUCTION
Emerging markets generally suffer from the lack of sufficient data for analysis, especially when it comes to long term cycles, and more particularly, secular cycles. So the question that needs an answer is: How can an investor / trader in an emerging country whose markets lack sufficient data long-term begin to learn about their market? This article will attempt to offer some evidence of a satisfactory solution to this problem. It should be noted here, however, that the author believes strongly that all markets essentially function with similar inputs/consequences and learning how markets that have been in existence for many decades will give the emerging market participant adequate information to apply to their respective markets.
CORRELATIONS
Correlations are useful because they can indicate a predictive relationship that can be exploited in practice. Correlation in reference to this article refers to the relationship between two data series in a manner that probabilistically shows they are not random. A good example that is not related to statistics or the markets might be the generally accepted correlation of college educations with incomes. The data generally shows that income is correlated to education.
With the advent and growing capability of the internet, world news coverage, global information readily available to everyone ever where, markets have been on a continuous track of rising correlations. This fact is further documented in a recent paper by McGill University and University of Houston researchers, entitled “Is the Potential for International Diversification Disappearing?” (March 16, 2010) To quote a few lines from their summary:
“For developed markets, the average correlation with other developed markets is higher than the average correlation with emerging markets. For emerging markets, the correlation with developed markets is generally somewhat higher than with the correlation with the other emerging markets. However, the differences are small; together with the upward trend in correlation this evidence therefore clearly contradicts the decoupling hypothesis.”
While the paper was created in regard to how international holdings in a portfolio might not offer the diversification expected, I also see it as a message that international markets are rising in their correlation to each other, and henceforth, can offer educational benefits to those in emerging and short life span markets, such as Vietnam.
Below is a series of charts (Figure A) showing various correlations between developed markets, emerging markets, and the correlation of both developed and emerging markets. Clearly, correlations are on the rise over the last 35 years. One would expect that this trend will continue.

Figure A
Therefore, back to the question of how Vietnam investors and traders can learn about how their market can be expected to work into the future can be derived by studying other markets that have a longer history.
EXAMPLES
Chart 1 below shows the VN Index (black) and the S&P 500 Index (blue) in the top plot and their annual correlation (red) in the lower plot. Whenever the red line is above zero it means there is some correlation and the higher the red line, the more correlated they two indices are. You can see that in bullish moves the two are fairly well correlated, while in bear markets that correlation disappears and at times is inversely correlated. This could be because the VN Index stocks reacted more quickly to eroding market conditions in late 2007.

Chart 1
Chart 2 below shows a similar chart using the Nasdaq Composite (red) and VN Index (black) over a slightly longer timer period with their annual correlation (red) in the lower plot. Clearly the information derived from these two charts is that the VN Index is more consistently correlated to the S&P 500 than the Nasdaq Composite. The S&P 500 is a capitalization index of large blue chip stocks while the Nasdaq Composite contains a wide variety of issues such as large cap, mid cap, small cap, technology, etc.
Chart 2
The differences in the correlations could be that the VN Index has about 180 stocks and the S&P 500 has 500 stocks and the Nasdaq has about 2400 stocks. Suffice it to say, study of the S&P 500 over its 83 year history will probably yield much information about market action that can be applied to the Vietnam markets.
CONCLUSIONS
As trading volume continues to increase in Vietnamese stocks, I believe the correlations with world markets will continue to rise. This increase in correlation to global markets will enhance the analysis of the Vietnam markets.
The initial part of my presentation in Vietnam in May will be devoted to how markets move and react to long term effects such as secular valuation changes. I strongly believe this is important to understand when applying technical analysis to the Vietnam markets. Learning this rich history of market movements will make the movements in markets that do not have long histories more easily understandable. I am truly looking forward to visiting your beautiful country and meeting the Vietnamese people. See you in May.
Greg Morris
Sr. Vice President and the Chief Technical Analyst for Stadion Money Management, Inc.