One of the most interesting things about the first week of the regular season is what team playbooks look like. Most coaches keep new routes, schemes, and star players under wraps in the pre-season so their opponents don’t know what to expect when the games actually start counting. That means there are always plenty of surprises when Sunday rolls around.
The stock market has certainly offered up its share of surprises in the past few days, too. We suffered a sharp, widespread, liquidation-style selloff last Friday. That was followed up yesterday by a sharp bounce, one that gained back a chunk (but not all) of those losses. Then today, we dropped almost 300 points on the Dow Industrials before bouncing ever-so-slightly into the close.
So in an effort to help you sort things out, I’d like to share my “playbook” for this market … the kinds of things I’m planning to buy or sell as a result of the action we’re seeing.
First, I’d be looking to exit emerging-market bonds and stocks. They’ve had a huge run up from the early-2016 lows. But they’re among the most vulnerable asset classes in the market if we do get a Fed rate hike either next week or later in the year.
They’re also radically overvalued under all but the most optimistic global economic assumptions. So don’t let those gains evaporate. Book ’em today. Sample ETFs would include the iShares MSCI Emerging Markets ETF (EEM) and SPDR Barclays Emerging Markets Local Bond ETF (EBND).
Second, I believe some the newfound U.S. economic weakness stems from sectors that are at the center of this “Everything Bubble” – sectors like autos and commercial real estate.
So I wouldn’t touch stocks in those industries with a 10-foot pole. They’re going to be at the center of any potential market storm. Think of selling ETFs like the iShares U.S. Real Estate ETF (IYR) or the stocks in benchmarks like the NASDAQ OMX Global Automobile Index, which you can find more details about here.
|Look out below! The bottom dropped out of the Dow — now what?|
Third, once we get through this bout of turmoil, there are some sectors and stocks I’ll be looking to buy into. Take defense stocks and select infrastructure names. They should benefit from the increased uncertainty and turmoil in the world, not to mention increased spending that could come after the election. Some funds that might be worth looking at include the ProShares DJ Brookfield Global Infrastructure ETF (TOLZ), the iShares Global Infrastructure ETF (IGF), or the SPDR Aerospace & Defense ETF (XAR).
Keep in mind that TOLZ is somewhat energy-heavy, though. The XAR also has exposure to the civilian aerospace market – a market where order-growth could slow if demand and profit trends don’t improve in the airline industry. A better approach would be to go through the holdings in those kinds of ETFs, scrub individual names using our Weiss Ratings system, then just buy the best of the best.
Lastly, I would encourage you to wait to do substantial bottom-fishing until the timing and pricing is right. We literally have only seen three days of increased volatility after many, many weeks of unnatural calm.
I believe patience will be rewarded, and that this isn’t (yet) the time to jump in with both feet. But if you’re looking for more detailed recommendations, as well as specific buy and sell advice, the best place to find it is my Safe Money Report.
So what’s your take? Do you think the “buys” and “sells” I just discussed are good ones? Do you have other ideas or strategies you’re taking advantage of? Are we due for a much more significant decline here? Or do you think the turmoil is almost over? Let me know on the website.
Market volatility is clearly becoming a big issue for investors like you, what with these multi-hundred-point swings in the Dow. So what should you expect next?
Reader Chuck B. offered the following take on investor attitudes and how that should factor into buying decisions: “Direction Alerts’ sentiment indicator has been between 95 and 100 (usually right on 100) for several months, indicating extreme complacency in the markets. Their take on that is that the current long-term bull market cannot continue, and that a long-term bear market is imminent.
“Take that for what it’s worth. But the debt bubble seems overdue for bursting, and I understand that a debt bubble set the stage for the Great Depression of the ’30s.”
Reader TN Flash had this advice when it comes to bargain hunting in more-volatile markets: “Don’t try to anticipate the market upturn. You never try to catch a falling knife. It will cut you nine-times-out-of-ten. Wait until the trend stabilizes and starts improving. There will be plenty of bargains to buy then.”
Clearly, Fed chatter has been a key driver of the latest swings, and Reader Delbert offered the following opinion about it: “It amazes me why ‘Fedspeak’ is even tolerated. It is so manipulative and political in the same speech. Markets should stand on their own and not be a Fed ‘tool’.”
Reader D. also brought up the interest-rate market and its influence on stocks these days, saying: “Volatility is in the bond market. All these markets are so connected together now because of crazy central bank policies and being so leveraged.
“Whenever you see tight ranges, look at the Keltner Channel. The longer a market stays in such a channel, the bigger the eventual explosion out of the channel.”
Thanks for weighing in. It’s clear to me the incredible collapse in volatility that we saw in late July and August was somewhat artificial and unnatural. As for the markets, we appear to have broken down out of the range created by that volatility crush.
I would be very surprised if we didn’t see more turmoil, and lower share prices, as a result. But it’s worth watching what happens at these key technical levels closely. A definitive break of 2,100 on S&P 500 futures or 18,000 on the Dow Industrials could be the sign we’re in for something potentially much worse than what we saw last Friday.
Agree? Disagree? Let me hear either way in the comment section below.
Wells Fargo (WFC) just agreed to cough up $185 million, and fired more than 5,300 workers, as part of a huge scandal. The scandal stemmed from bankers opening unwanted accounts for customers in an effort to hit aggressive sales targets.
But we’re now learning the bank has no plans to “claw back” any of the massive $125 million in shares and options that community banking head Carrie Tolstedt is walking away with this year by retiring. Tolstedt led the division for eight years, including the period during which the unauthorized account opening occurred. Does that sound right to you? I’d love to hear your opinion in the comment section.
OPEC members are continuing to crank out crude, despite periodic talk about curtailing production – and that means the oil glut will last well into next year. That’s the conclusion of a new widely anticipated report from the International Energy Agency in Paris. Lackluster demand growth in Asia should also keep a lid on pricing. The news helped weaken oil futures in early trading.
Here’s a novel theory coming from some corners of the economics world: Central banks are TOO independent from governments. Instead of claiming they aren’t beholden to politicians, they should do things like directly finance “helicopter money” programs by buying up billions of dollars’ worth of newly issued bonds. Those bonds could be used to finance things like infrastructure spending.
Do you think that theory holds any water? Donald Trump certainly doesn’t, saying in an interview with CNBC yesterday that the Fed is deliberately keeping rates too low to support President Obama. What about the outlook for oil – are prices headed up or down, and what should investors do about it? Let me know what you’re thinking below.
Until next time,