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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.
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| 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.
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 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.
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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,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Yet again we are shown that banks are beyond the law. If I pulled this type of fraud in my business and was found out the only thing I would see is the inside of a jail cell. Apparently the justice system is skewed, the more you have the more you get away with. Pretty sure robbing the bank is against the law. How much worse is it to use people who put their trust in your bank, just to find out you not only have no regard for the faith and trust people have when they think of the saftey in bank, but in fact the bank will definitely take advantage of you as often as possile. After all its just business, right……
Welcome to America’s crony-capitalism, the “pay to play” system of big government/big business and the legal system lawyers/judges/courts. It ain’t pretty, but it’s America today. Follow the money, follow the corruption.
Banks are not beyond the Law, they are the law. See Bank Bail Ins
You are one sharp cookie young man regardless of your affiliation with the Patriots although Boston College ain’t far away – they have a upcoming meeting with the Texans and we will be there – on a serious note , you provide great logic to the market’s movements and only wish you had a daily blog – very much look forward to reading your wisdom as you are my reason for being here – Tom
I certainly agree with Emerging Markets and Infrastructure. The Emerging market is in worst shape than the US markets in terms of debt and growth as a result of debt. Infrastructure benefits from either a Trump or Clinton win domestically. Defense spending will increase domestically and internationally with US defense purchases from abroad on the increase due to China’s recent behavior in the region and rogue countries like North Korea.
Hi Mike:
As the old Wall Street saying goes: “They Don’t Ring a Bell at the Top”
We may be seeing the beginning pop of the asset bubbles in stocks and bonds that have been created by Central Bank Money Printing.
When the Hedge Funds and Momentum Players, want to sell, who will want to buy?
Banks acting badly with no real accountability=tea party=Donald Trump. Wells Fargo should lose its charter.
BULL crap. Dems are in charge. 8 terrible years of Ozamma! REMEMBER? HE signs he law. HE does EOs. Helocopter Ben? Print Money? PRINT MONEY???REMEMBER??? compliant Repubs. all BULL crap. You are looking thru rose colored glasses.
Mike
I think there is no playbook to understand the current economic environment. I think that the financial markets will continue to have calm periods and then large volatility and then calm again. This will continue until it become clear on certainty and clarity around US Presidential election, Brexit, QE scale and duration .
I think the strategy should be to trade the bumps and to make small gains regularly..
John
Chuck B :
For what’s its worth, long term (US) stock market ( relative strength) is pretty strong according to one portfolio manager’s models that I know. So, a long term bear market probably is not yet ready to emerge. Long term is “months to years”. Its definitely an art for a good manager to differentiate between a correction like we had last August or in Jan-Feb. 2016 and the beginning of bear market. More Market Pull-backs on the way, no doubt, but not a real secular bear yet.
Relative Strength investing puts your money in those sectors with the greatest current strength and momentum ( the ones that are working) and goes with the flow of the market, long term and short term. Each market sector ( 12 in the S&P 500 Index) and sub-sector ( there are 40 of them ) has different relative strength ratings at any given time. The differentials is where you really can make extra total returns.
Its very dynamic, adaptive, and tactical approach to investing and is the way institutional level investors operate. Not a stationary (static) “strategic” portfolio, as most retail investors are accustomed to. Consequently, there is a secondary timing element involved, as well. If further interested, I would share further information. ( private e-mail only ).
What stocks to buy in defense any specific names that you gentlemen can give me. What about physical gold and silver is that a safe bet now or should I wait for it to drop a little bit in price? If you guys do think that gold and silver will drop before the market tanks what price should I wait for it to drop to before buying Any other recommendations also would be greatly appreciated I have 3 kids to feed and only make about 30000 a year which doesn’t go very far in this day and age which is very sad because in my father’s generation you could buy a house with that kind of money and still have change left over to buy a brand new car how sad things have become please help. My kids wife and I would be forever greatful for any sound advice you gentlemen could offer to help us not have to struggle n stress every time the bills come in. Thanks in advance for your advice.
MIKE,
TELL IT STRAIGHT. I AM HEAVY GOLD AND SILVER STOCKS. I THINK SHORT TERM COULD BE UP/DOWN…..MORE SLIGHTLY DOWNISH. BUT MID TERM AND LONG TERM-BIG UPSIDE !!! I AM HOLDING STRONG. WITH ALL THAT IS GOING ON…..DEBT,CREDIT, BONDS AND STOCK OVER VALUATIONS-HOW CAN GOLD AND SILVER NOT GO UP BIGTIME ??? PLEASE LET MANY OF US KNOW YOUR THINKING ON THIS.
THANKS, JAY TROW
All central banks are walking the same tightrope. Central banks have two constraints on their behavior: they must print enough money to keep their government happy so they can keep their money-printing monopoly, and they must not print enough money to make their money-printing monopoly worthless through hyperinflation. Put another way, they must inflate our money to worthlessness for the profit of the government and the bankers, but they must never do it fast enough that we catch on.
Nominally independent or openly government controlled, it doesn’t change a thing.
Please don’t include anything that speaks of what “Donald Trump thinks”. It’s just too unmentionable.
“Crystal ball” investment strategies based on good old fashioned technical and fundamental analysis have become obsolete, “out of the window” so to speak! Thanks to Central Bank intervention, the new norm these days is to trade defensive with hedging strategies capable to produce a profit, no matter which way the market will go! To do this effectively, we need to think and act like Market Makers do! That is a skill-set on its own with new rules and tactics to make sure we do not loose our shirts (and pants) in the process! Go figure!!
The bottom fishing Mike recommends seems like a good idea, but only when the markets seem to be coming off the coming declines. I wonder what he thinks of things like REITS that specialize in government office buildings and health facilities of various kinds, which should not be hurt too much unless interest rates stage a comeback, raising their costs.
Hello Mike,
Currently, there is no shortage of hysteria on the financial internet regarding future failed banks being forcibly bailed out by those banks’ very own depositors. (This actually did happen in Cyprus a few years ago.) Many of these stories lead onto a pitch to buy gold. However, gold too was confiscated by FDR, so that also may not be the answer.
Your subscribers would appreciate your analysis and opinion regarding the possibility of bank depositors being forced to bail out failed banks. Would this practice apply only to banks, or would it be extended to include investors’ accounts at financial houses such as Fidelity, Schwab, Vanguard, etc.? How should investors protect themselves from being caught up in this eventuality?
Sincerely,
Don Mackay
being 87 i look back at breaking business rules and today its sorta too easy were in the greatest country in the world why break codes. wells fargo could pay the stiffest penalty even go to prison; what does our young people think; the man running for our highest office isnt qualified; the gop wasnt happy living here so we end up with a nobody our mother country has a woman seems to do okay. weare overdo for a big correction in stock market have it and get it overwith and go to new greater things. im in oil country i suspicion that the Saudi wants us to hold back;they have more oil qand more money so get ready for cheap oil.
“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.”
What do you mean ”we”, kimo sabe? This is typical manic-depressive market behavior, the “buy the dips” kind of crap. It’s not a trend till it ends. I won’t go short until a one-day close below 2% happens. Then, look out below.
RE your reader Delbert, on FED speak: It is not bad or wrong for FED officials to try to educate the public, but what is amazing is that so many professionals so over react to every utterance. If they can’t do their own analysis, they should not be in this business. For the way they operate, they are terribly over paid.
Actually the ECB is owned by the central banks of the european countries (Germany, France, Italy a d so on). On their turn the natio al central banks are owned by local banks, insurances and financial groups. European governments have no say in the policy of ECB.
About Wells Fargo. It seems obvious this Tolstedt knows too much to be taken dare off. This person is certainly the lid to cover the sewer pit. There is just one thing to do for regular people. Avoid and walk away from this institute. We have ABN-AMRO here which is just the sane. Too big to fall? Lets try for once is my advice to politicians. It will terminate corruption I think. Oops, I forgot the corrupt politicians.
http://www.otcmarkets.com/stock/RPMGF/quote and the one everyone is looking for TBT on 12/19/16. Fraud and corruption running rampant so they will wait until after the election to raise rates or lose control of rates. http://finviz.com/quote.ashx?t=TBT&ty=c&p=d&b=1
had to deal with Wells Fargo a couple of years ago helping a relative out of foreclosure. My opinion is that they are a bunch of thieves dressed in bankers clothing. Kept trying to pay them off and the balance changed every hour with new penalties and charges. I literally could not pay them off quick enough to get the charges stopped. if I ran my business in that manner I would be out of business!! Some one , or several, in that organization needs to do some jail time to give other bankers something to think about. Might as well throw a bunch of politicians in there with them for good measure.
A reader inquired about the stock market in the inflationary period of the 70’s. I actively monitored that as it played out; the sequence was:
1) Inflation began to expand rapidly
2) in the early stages, company input costs began to climb, but prices could not, as wages had not (yet) indexed upwards, so corporate profits were hit hard early, and stocks did poorly
3) as time passed wages indexed upwards, so prices rose and companies eventually gained the pricing power to be more profitable, so earnings grew and stocks rose