The S&P 500 plunged 7.15% while the MSCI Emerging Market Index plummeted 9.62%. Almost a trillion dollars was wiped off of the benchmark S&P 500 Index alone. With a 500-point-plus nose dive in the Dow Jones on Thursday, this drop in the U.S. markets was the worst since November 2008. U.S. stocks now are down 10% from this year’s peak — the first pullback that qualifies as a full-blown correction in more than two years.
And this happened before Standard & Poor’s downgraded America’s triple-A credit rating for the first time to AA+. This marked the first time that the credit rating of the United States has been downgraded, since rival Moody’s first gave the country a credit rating in 1917. The downgrade puts the U.S. debt rating on par with Belgium and below countries like the United Kingdom and Australia.
Your Bull Market Alert portfolio suffered as well. You were stopped out of CROCS (CROX) for an 18.64% gain. You also hit your stops in Rayonier (RYN), Avigo (AVGO), Hansen Natural (HANS) and Novo Nordisk (NVO) — all at losses. On Thursday, investors threw out the baby with the bathwater. For example, Hansen Natural (HANS) jumped 8% on Friday, after reporting strong results after Thursday’s close. Earnings grew 30%, compared with analysts’ estimates of 22%. Sales advanced 26%, versus a projected 19% gain.
So what does all this mean for global stock markets moving ahead?
Sentiment is extremely negative. Even before the downgrade, the IBD/TIPP Economic Optimism Index plunged 13.5% to 35.8 — the lowest since the poll began in 2001. It took out even the low of 37.4 set during the summer of 2008, when the financial crisis exploded into the nation’s headlines. And these readings don’t even measure the impact of this weekend’s S&P 500 downgrade.
On the one hand, I am tempted to recommend a bet against the S&P 500 like the ProShares Short S&P 500 (SH) or the Ultrashort S&P 500 ProShares (SDS), which was up 15.13% last week.
On the other hand, I also know that during times of extreme pessimism like this, the market tends to bounce short term. That’s why I’m reluctant to recommend a position that could go against you so sharply on any (overdue) bounce this coming week.
On the positive side, the historical precedent for the year ahead is not that bad for the stock market, after a downgrade like the one that the United States just suffered. When Canada lost its AAA rating in April 1993, its stocks gained more than 15% in the next year. The Tokyo stock market climbed more than 25% in the 12 months after Moody’s downgraded Japan in November 1998. With so much uncertainty on Monday’s open, this is the time to step back from the plate. If we have a short-term bounce, it will be well-deserved. But for now, hold on tight and — as always — stick to your stops.
ProShares Ultra Silver ETF (AGQ) ended the week 8.35% lower. Nearly every asset class took a hit during the recent market sell-off, and precious metals were no exception. Silver will likely make a strong recovery as gold and other precious metal stocks/ETFs regain their footing. AGQ remains a BUY as it hangs tough above its 50-day moving average.
Alliance Resource Partners L.P. (ARLP) dropped 8.19% this past week. ARLP recently reported positive earnings and announced a 3.7% boost in its dividend. The company also announced committed coal sales booked well into 2014. In addition, Wells Fargo recently upgraded ARLP. ARLP is currently a HOLD.
Bank of Ireland (IRE) fell 14.58% last week. IRE took a breather this week after two straight weeks of gains. Having already attracted high-profile private equity investors, IRE likely will continue its rise once markets stabilize. Bank of Ireland will report earnings on Aug. 11. IRE ended the week just above its 50-day moving average and remains a BUY.
National Bank of Greece SA (NBG) lost 9.92% over the past five days. NBG’s trading price has ranged like clockwork for nearly three months, bouncing between $1.20 and $1.50. NBG broke below $1.20 two days ago, right along with the global meltdown. I expect this position to swiftly regain its “rolling” posture as soon as the overall market stabilizes. NBG is a HOLD.
Toyota Motor Corp. (TM) fell 5.18%. TM reported earnings Aug. 2. The company reported large declines in income and revenue, and posted an operating loss as well. Even with this expected bad news, TM’s share price was nearly unchanged. However, TM was unable to escape the massive declines that rocked world markets over the past few days. TM is a HOLD.