U.S. Markets Consolidate as a Chinese Stock Market Crash Looms

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

It was mixed news for U.S. stock markets this past week. The Dow Jones fell 0.48%, the S&P 500 rose 0.07% and the NASDAQ gained 0.74%. Meanwhile, the MCSI Emerging Markets Index rose slightly by 0.21%.

Big gainers included Illumina Inc. (ILMN), which rose 4.36%; the Market Vectors Biotech ETF (BBH), which gained 1.60%; and Union Pacific Corporation (UNP), which gained 1.23%. The Vanguard Russell 2000 Index ETF (VTWO) also hit a new 52-week high.

Three of your positions fell below their 50-day moving averages and changed to a HOLD. These include the iShares S&P Global Timber & Forestry ETF (WOOD), Actavis plc (ACT) and iShares MSCI Philippines (EPHE).

U.S. markets were largely in a holding pattern this past week. That’s nothing new. Looking at some of my favorite technical indicators, the U.S. market has not been trending since late March. Looking at the chart of the S&P 500, it is at a critical juncture. If it is unable to break out to the upside in the next few days, we are looking at a rather ominous “triple top.”

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The same cannot be said of emerging markets, which have broken out to the upside and are trading at six-month highs. This is largely explained by China’s 23% weighting in the MSCI Emerging Markets Index and the mania that has gripped the Chinese stock market. Some Chinese investors are taking out second mortgages to play the stock market. Indeed, 1.68 million new brokerage accounts were opened in the week ended April 10.

Valuations are through the roof. In China’s Shenzhen market, half of the stocks followed by analysts have forward price-earnings (P/E) ratios above 50. In the Shanghai market, only about one-third of stocks have forward P/E ratios above 50. By way of comparison, less than a tenth of the stocks in the U.S.-based small-cap Russell 2000 have a forward P/E above 50.

Here’s my prediction. The Chinese citizens taking out second mortgages are going to lose a lot of money. This kind of bubble-induced frenzy of buying always ends with a painful crash.

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Portfolio Update

Berkshire Hathaway (BRK-B) dipped 1.13%. In a rare occurrence, BRK-B touched down to its 200-day moving average (MA) last week. BRK-B has not stayed beneath this level since January 2011. Each time BRK-B did hit this level, it resulted in a significant multi-month move higher. The addition of a few other positive chart indicators puts BRK-B at an excellent buying point. Technically, BRK-B is a HOLD.

Global X Guru Index ETF (GURU) remained largely flat last week. GURU takes the stock picks of the largest hedge funds and attempts to capitalize on them — and this strategy has worked out quite well in recent months. GURU’s 52-week high, and resistance ceiling, is very near the $27 price level. GURU currently is just under this price and has been making a concerted effort as of late to break above. GURU is a BUY.

Vanguard Russell 2000 Index ETF (VTWO) ended the week flat after dipping slightly from its 52-week high early last week. This play on small caps has been a winner so far this year, gaining consistently since the opening of 2015. VTWO remains above the 50-day MA and is a BUY.

Markel Corp. (MKL) lost 2.22%. MKL will report earnings on May 6 after markets close. MKL’s last earnings report reflected a 15.8% increase in earnings per share (EPS) on a year-over-year basis. With low corporate debt, good revenue growth and steady stock performance over the past quarter, MKL is poised to deliver another solid quarter. MKL is a BUY.

Union Pacific Corporation (UNP) gained 1.23% over the past five trading days. UNP will report earnings on Thursday before markets open. Major rail competitor CSX reported earnings last week, beating estimates by $0.01 EPS and reporting revenue in line with analysts’ estimates. CSX also reported that the strong U.S. dollar, as well as lower fuel prices and surcharges, helped their numbers. With UNP’s stock down over recent weeks, a similar earnings report could send UNP rallying higher. UNP is a HOLD.

Exclusive  Markets Bounce and the NASDAQ Breaks Out

Google Inc. (GOOGL) rose 0.58% last week. Google will report earnings on Thursday after markets close. A Bloomberg BusinessWeek book due to publish next month cites credible reports that high-tech electric car manufacturer Tesla Motors Inc. was almost sold to Google back in 2013. This would have been an interesting Google acquisition indeed, and possibly one that could have seen Google entering the car-manufacturing business. GOOGL is a HOLD.

Illumina Inc. (ILMN) rose 4.36%, getting off to a tremendous start as the latest holding in your portfolio. ILMN reported favorable earnings yesterday to push the stock higher on strong volume. Illumina’s first quarter EPS was $0.91 vs. a $0.70 analyst estimate. Revenue came in at $538.6 million vs. a $524 million estimate. ILMN also raised its EPS outlook for the upcoming fiscal year. ILMN is a BUY.

Newly Updated Special Reports

As a courtesy, I invite you to view the newly updated version of The Top 12 Stocks for 2015, which features three of my top investment recommendations from the recent Orlando MoneyShow, as well as bonus picks from each of my fellow investment newsletter editors at Eagle. Also check out other recent reports: My Safest Bet on Booming Biotech, Alpha Opportunities: Where the Smart Money is Investing Now, Buffett-Beating Investment Strategies: 3 Ways to Outperform Berkshire Hathaway, Hedge Fund Secrets of the Masters and The $19 Trillion Key to IoT. These reports and others are available FREE on my website to you.

Nicholas Vardy

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