Daily Investment Interpretations

November 16, 2010

2010-11-16 (Tuesday Night):  The markets plunged again today: U.S. stocks slide in echo of Asia markets, Read more about Asian stocks’ tumble., U.S. stocks slide on Ireland debt crisis. The NASDAQ Composite contracted by 43.98 points (-1.75%) to end the day  at 2,469.82  The Dow lost 178.47 points (-1.59%) to close at 11,023.50, and the S&P 500 dropped 19.41 points (-1.62%) to end at 1,178.34. Oil dropped to $84.57 a barrel, and Gold ended at $1,360. The VIX climbed 2.38 to 22.58.  
    It's uncanny. It never fails. The day that I decide that everything's going to work out, and that I  take advantage of bargains in the markets to load up my portfolio, the markets collapse, and I'm forced to reverse the wonderful moves that I just made. 
    The emerging markets fell below their 50-day moving averages today, and triggered a "sell" signal. (My investment advisory service has, in fact, issued a "sell" signal for emerging market stocks.) As luck would have it, I've held off presenting my options strategy here while I pondered some improvements to it. Basically, it has consisted of buying two-year, deep-in-the-money calls on emerging market ETFs. That's probably still sound even if emerging market funds fall over the short- or intermediate-term. In two years, emerging markets ought to recover. Still, one hates to charge into emerging markets if they're heading for a nasty fall. Or to say it more positively, it may be possible to pick them up quite a bit cheaper a few months from now. But if life hands you lemons, it's time to make lemonade. (Or, as ex-President Nixon put it, "when the going gets tough, the tough get going".) 
    What I personally plan to do is to buy some low-cost ("at-the-money" or "out-of-the-money") puts tomorrow morning to offset my emerging market calls. I may also sell some of my calls in order to wait to re-purchase them when a better opportunity presents itself. Although I may "lose" a bit of money, I won't necessarily have lost money long-term if I can buy back later at a lower price.
    My investment advisory service has been notably silent concerning this latest air pocket. Yesterday's advisory-service assessment was that the pullback had been orderly, but of course, today saw an abrupt nosedive. The S&P hasn't yet violated its 50-day moving average, so that may be influencing the fact that my advisory service hasn't yet given a "sell" order. And I can't trust my instincts in deciding what the markets are going to do next. 
    I would really welcome guidance tonight, and the usual sources aren't providing it.
    One fact that must be considered is that the U. S. Federal Reserve is in uncharted territory, and so far, its QE II is apparently not working.
    As of yesterday's close, Cabot China and Emerging Markets Report was still positive. Yesterday, it had fallen below its 25-day moving average but was still above its 50-day moving average. Today, it broke its 50-day moving average.
    For what little it may be worth, U. S. stock futures are up a bit tonight. Meanwhile, Chinese, Australian, and Japanese markets are down in early Wednesday trading. Unfortunately, Shanghai and Hong Kong have opened sharply lower tonight, magnifying losses in the China FXI. Hopefully, that won't necessarily be replicated in the Brazilian index, EWZ, or in the Emerging Markets exchange-traded fund, EEM..
    I suspect that we're looking at an emerging-markets meltdown.      
    Robo-signing the tip of the iceberg  Senator Dodd is teeing off on the banks again.
    Bulls, bears vie for near-term  This is Michael Ashbaugh's weekly technical analysis column He concludes that although the short-term trend may have farther to go, the long-term trend is still up.      
    Is the gold bubble about to go manic?  Brett Arends
    Why your mind takes trading risks  David Weidner

8:30 p. m. Update:
    My investment advisory service has spoken: Has Worry Replaced Hope in the Markets?, but unfortunately, it doesn't know what's coming, either. China is looking out for China, as well it might, and the European debt dilemma threatens to engulf other PIIGS.
    I plan to play it by ear in the morning, but I also plan to cut my exposure to emerging markets by selling some of my calls, and by buying emerging market puts.. In addition, I'll sell my (so far, profitable) small position in the commodities fund UYM, and close out my position in the S&P 500 index fund. Of course, if the Irish debt problem is resolved, that may improve everyone's outlook, but I think it's time to trim sails in emerging markets until they can correct and reset at a lower level.
    Anyway, that's what I'm thinking tonight.

(Tuesday Afternoon):
  With a very red face, I'm going to have to take back and reverse everything I said this morning. First, whoever wrote that South Korea was through with rate hikes was lying in his teeth. South Korea hiked rates this very day: Wall St. echoes Asia slide. Second, here's a compelling warning against buying emerging markets funds right now: Global fund managers at most bullish since April:. "The report said asset-allocation managers have depleted cash reserves and are now suggesting a rare negative weighting in cash, while the average cash holding of the managers surveyed was just 3.5%. The authors called this data point a contrarian tactical sell signal for equities. The percentage of fund managers recommending an overweight position in emerging markets rose to a near-record 56%."
    I truly hate making a mistake like this, especially since I've "bought the farm" today myself. (I just sold some of the calls I had bought today at a slight loss.)

(Tuesday Noon):
  So what should we make of a bloodbath like we're seeing today? I think it's a good time to be buying emerging markets. Irrespective of what happens with the U. S. and Europe, emerging markets are going to continue to perform. I've been buying into the South Korean ETF, EWY. South Korea isn't facing galloping inflation and won't need to raise interest rates in the near future.
    My investment advisory service still considers this shakeout to be a correction in a cyclical bull market. But the news must be grim enough that it drives professional investors out of their positions. And that must take a lot of bad news. It's "Lucy and the football".
    Of course, this could be a major takedown, but if so, there will come a time to short the markets, and my investment advisory service will (hopefully) know when that will be.
    Oil and gold are plunging.