Pessimism Abounds as Summer Fades

Nicholas Vardy

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

U.S. markets rebounded slightly last week with the Dow Jones up 0.62%, the S&P 500 rising 0.62% and the NASDAQ gaining 0.45%. The MCSI Emerging Markets Index continued to pull back, dropping 3.75%.

Gainers in your Alpha Investor Letter portfolio included Markel Corp. (MKL), up 0.98%, and Allergan plc (AGN), which rose 0.89%. The Guggenheim S&P 500 Equal Weight ETF (RSP) also rose 0.71%.

Two positions, the AdvisorShares TrimTabs Float Shrink ETF (TTFS) and the Guggenheim S&P 500 Equal Weight ETF (RSP), moved back above their 50-day moving averages and are now back to a BUY.

The iShares MSCI Philippines (EPHE) was caught up in the emerging markets sell-off and you were stopped out at a loss.

Investors are hating the stock markets no matter where they look.

According to Bank of America Merrill Lynch’s latest global fund manager survey, investors haven’t been this cautious on the U.S. stock market since 2007. Overall exposure to the U.S. stock market moved to a 14% net underweight position. This marked the sixth straight month that fund managers were net underweight in the U.S. stock market. That makes for the longest stretch since 2007 in the run-up to the financial crisis.

Nor could sentiment about emerging markets be much worse.

Today, sentiment in emerging markets stands at its third-lowest level of the past decade. The only lower readings occurred in July 2006 and August 2013. The good news is that both previous bouts of pessimism preceded rallies of more than 15% over the next three months.

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Looking at it from a longer-term perspective, emerging markets have now basically gone nowhere for almost a decade. In a trading-range market like that, buying pessimism and selling optimism is often an excellent way to generate returns. And emerging markets also tend to perform well in Q4, so we could end the year on a high note.

The only plays investors are feeling okay about are in Japan and Europe — largely because of the strengthening U.S. dollar. You have broad-based bets on each of these positions through WisdomTree Japan Hedged Equity ETF (DXJ) and iShares Hedged MSCI Germany (HEWG).

Portfolio Update

Berkshire Hathaway (BRK-B) dipped 1.01% over the last five trading days. Given the lows that oil has been hitting over recent months, it is interesting that Berkshire Hathaway sold off a $100 million position in National Oilwell Varco (NOV) and a $600 million position in Phillips 66 (PSX) last quarter. Warren Buffett is not a “sell at the bottom” kind of guy. Such a move makes you wonder what Buffett sees in the future of the already-battered oil markets. BRK-B is a BUY.

Vanguard Russell 2000 Index ETF (VTWO) dipped 1.23%. In keeping with my bet that small caps will “Beat Buffett” and outperform most other sectors, VTWO’s chart appears to be painting a picture of higher price levels in the fourth quarter. VTWO bounced recently from its established 2015 support level of $96.00. This action occurred at the robust 200-day moving average (MA), a support level that has been respected since November of 2014, and the Slow Stochastics technical indicator is implying bottoming as well. Currently below the 50-day MA, VTWO stands as a HOLD.

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Allergan plc (AGN) rose 0.89%. AGN reported earnings on Aug. 6, beating analysts’ estimates, yet still experienced a 5% intra-day loss on the news. However, AGN has spent the past two weeks in a consolidation pattern, trading sideways and staying above its 50-day MA. AGN’s CEO reported outstanding momentum on the integration of Actavis and Allergan, and AGN is very likely to see higher prices on the back of the earnings-day pullback. AGN remains a BUY.

Google Inc. (GOOGL) remained flat last week. Google announced major news early last week that it was restructuring its holdings under a new corporate umbrella named “Alphabet.” The new restructure, hailed widely by investors as a positive move, places classic Google (i.e., YouTube, Android, Chrome, Google Maps, etc.) into one major entity under Alphabet. The other more experimental properties that Google holds (i.e., Google X, Google Fiber, Nest, etc.) will fall under Alphabet as well, but as individual entities, making their operations much more transparent. Your ticker remains the same, GOOGL, under this new structure. GOOGL is a BUY.

Illumina Inc. (ILMN) dipped 0.76%. Illumina recently announced that it will acquire the industry-leading laboratory information management system maker GenoLogics Life Sciences Software. This acquisition will strengthen ILMN’s portfolio of genetic analysis solutions and give it a stronger position in its market segment. ILMN is a HOLD.

Guggenheim S&P 500 Equal Weight ETF (RSP) rose 0.71% last week. RSP weights all of the S&P 500’s holdings equally — including all of the small-cap holdings. With small caps possibly looking to a brighter fourth quarter, as I highlighted above for Vanguard Russell 2000 Index ETF (VTWO), and RSP’s move to a “Buy” this week, RSP may beat the S&P 500 over the final months of 2015 using the power of small caps. RSP moved above its 50-day MA last week to become a BUY.

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The Walt Disney Company (DIS) dipped 0.62% for its opening week in your portfolio. Buying great companies on significant stock-price dips is typically a winning strategy — especially when that company is Disney — and they own the prime live-sports network, ESPN. A look at a five-year Disney stock chart reveals that this is quite a stand-out pullback for Disney’s stock. DIS is a BUY.

Nicholas Vardy

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