Sifting through the Rubble of the Markets

Nicholas Vardy

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

The past five days marked the worst week in global stock markets going back to August of 2011, when U.S. stock markets dropped by a similar amount. This past week, the Dow Jones was down 10.54%, the S&P 500 tumbled 10.94% and the NASDAQ fell 10.93%. The MCSI Emerging Markets Index pulled back 8.75%.

Not surprisingly, you hit your stop price on many of your positions in your Alpha Investor Letter portfolio.

These include the Guggenheim Spin-Off (CSD), Vanguard Global ex-US Real Estate ETF (VNQI), Global X Guru Index ETF (GURU), Skyworks Solutions Inc. (SWKS), Market Vectors Biotech ETF (BBH), Illumina Inc. (ILMN), PureFunds ISE Cyber Security ETF (HACK), KraneShares CSI China Internet ETF (KWEB) and the Hedged MSCI Germany (HEWG).

In terms of specific strategy for your Alpha Investor Letter portfolio, I am keeping all of these positions on the watch list, with an eye toward re-entering them as the market settles. This is a strategy that has worked for us in the past with specific stocks such as Skyworks Solutions (SWKS).

Several positions also fell below their 50-day moving averages and changed to a HOLD. These include Berkshire Hathaway (BRK-B), Markel Corp. (MKL), Allergan plc (AGN), Google Inc. (GOOGL), AdvisorShares TrimTabs Float Shrink ETF (TTFS) and the Guggenheim S&P 500 Equal Weight ETF (RSP).

At times like this, it’s worth keeping the sell-off in perspective. There are many historical precedents to suggest that the market is near capitulation, some of which I highlighted in yesterday’s issue of The Global Guru.

Here are a handful additional precedents which bode well for the months ahead…

1) The S&P 500 has now suffered five consecutive losses of more than 1%. Selling has not been this relentless by this measure since the market bottomed in March 2009. Specifically, in the past 50 years, four consecutive losses preceded five bear market lows, with two failures. The good news is that even including the failures, all of the instances showed a positive return 12 months later, averaging a gain of 24%.

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2) The S&P 500 has now lost at least -10% during August. In the past, it has lost at least -10% at some point during August five times. Again, the historical precedents are encouraging, with returns over the next six months averaging 16%. Specifically, returns over the next six months were 12.5% (1966), 13.1% (1974), 13.8% (1990), 29.3% (1998) and 12.0% (2011).

There is no question that this is a market on edge. But there are plenty of signs that suggest that we are near the end.

That doesn’t preclude the possibility of further losses. But even if that occurs, keep in mind that looking out a couple of weeks, returns have consistently been positive.

Portfolio Update

Berkshire Hathaway (BRK-B) lost 9.63% last week — one of the worst trading weeks in recent memory. Although BRK-B did move within striking distance of its $122.00 stop, this stock has made attempts to regain ground over the past two trading sessions. Barclays currently has a $169.00 price target set with a rating of “Overweight.” BRK-B fell below its 50-day moving average (MA) to become a HOLD.

Markel Corp. (MKL) fell 10.95%. MKL also did not escape the broad market correction. This position remains quite profitable in your portfolio, and once the dust clears, it will likely be among the first to rise. RBC Capital Markets has MKL’s price target set at $900.00, Markel’s high from just a few weeks ago, with a rating of “Sector Perform.” MKL also moved to a HOLD.

Cambria Global Value ETF (GVAL) gave back 5.58% over the last five trading days. The “cheapest markets in the world” became even cheaper last week, along with nearly every other investable asset on the planet. Despite an average loss of 10.5% in the major market averages last week, GVAL only gave back half of this amount. GVAL is a HOLD.

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Allergan plc (AGN) lost 9.26%. AGN and Gedeon Richter Plc will present test data this weekend on a promising new drug that is in earlier stages of its development. Cariprazine is being developed for treating patients with schizophrenia and acute mania in bipolar I disorder. This will be the first time the companies have unveiled results for this drug. AGN fell below its 50-day MA and is now a HOLD.

WisdomTree Japan Hedged Equity ETF (DXJ) fell 14.71%. Looking at recent data, DXJ falls among the top-10 exchange-traded funds (ETFs) for incoming assets on a year-to-date basis. DXJ is a HOLD.

Guggenheim S&P 500 Equal Weight ETF (RSP) lost 10.56% last week. This compares to the regular S&P 500 Index (SPX) falling 10.94%. And the S&P 500 SPDR ETF (SPY), yet another way to trade the S&P 500, slid 10.82%. Comparing the three, one might conclude that when “black swan” market events do occur, it can be painful no matter how one trades a given index. RSP moved to a HOLD.

The Walt Disney Company (DIS) dropped 10.33%. Despite another sell-off at the close of yesterday’s trading session, Disney and Apple were the only two Dow Jones components to close higher. DIS is a HOLD.

 

Nicholas Vardy

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What a week it has been… During the course of the past five sessions, the S&P 500 has corrected by 10%. Yesterday, it suffered its worst day of trading since 2011. And the Shanghai stock market tumbled 19% during the past week, erasing all of its 2015 gains. As someone who manages money for private clients, it is a challenging time. Unlike when I was a mutual fund manager and my job was to be "fully invested" through thick and thin, I am forced to make decisions on whether to ride o

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