The Global Bull Pulls in His Horns for a Possible September Pullback

Nicholas Vardy

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

I think there is a good chance that global markets will pull back 10% or so during the next few weeks, similar to the way they did in early June. Asian markets have already had a relatively weak August. After that, I expect global markets to resume their upward trend for a traditional Q4 rally.

So how is your Global Bull Market Alert portfolio positioned for the current market climate? Last week’s pick is a short-term bet against a big basket of emerging market stocks through the UltraShort MSCI Emerging Markets ProShares (EEV). If global markets swoon in September, this ETF will soar.

I also temporarily moved many of your positions, including Baidu, Inc. (BIDU), the Claymore/AlphaShares China Real Estate ETF (TAO), the iShares MSCI BRIC Index ETF (BKF), the SPDR S&P Emerging Markets Small Cap ETF (EWX) and the iShares MSCI Hong Kong Index (EWH), to a HOLD.

All this cautiousness notwithstanding, let me play devil’s advocate with myself. Financial markets tend to climb a “wall of worry.” And because of global markets’ strong run-up in the summer, this may be the best telegraphed “September Swoon” in recent financial memory. And as John Templeton observed, bull markets end on euphoria — hardly the mood today. This is all the more reason to think the pullback might not happen. After all, the stock market actually jumped in both September of 2006 and 2007. The time honored advice of “Sell in May and go away” didn’t hold up this year, either.

Looking beyond September, here’s why I am optimistic for the remaining part of the year. A lot of the very large institutional investors were caught flat footed, missing a huge summer rally. As investment committees of the world’s largest financial institutions meet and make asset allocation decisions for 2010, they will see that the economic green shoots of the spring are now lasting. That means that they will want to increase their exposure to global stock markets. After all, nothing looks worse for a mainstream fund manager than to be outperformed by his peers.

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The bottom line? The global stock markets are even more uncertain than usual. And that’s the best reason to pull in your horns over the next few weeks. But after September’s bout of nervousness, get ready to pile back into global stock markets for what I expect to be a very strong fourth quarter. At that time, I also expect to make more option recommendations for some of your existing holdings for those of you willing to take on more risk.

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) ended the week slightly higher as the Chinese market bounced from its recent sell-off. BKF remains a HOLD.

Baidu, Inc. (BIDU) ended the week higher as the Chinese market recovered. I am keeping BIDU at a HOLD.

The WisdomTree Dreyfus Emerging Currency ETF (CEW) rose slightly in the past week. This low volatility, defensive position remains a HOLD.

iShares MSCI Chile Investable Market Index (ECH) ended the week lower. Strong macroeconomics of Chile notwithstanding, ECH remains a HOLD.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) ended the week almost 2% higher. This is one of the few country ETFs that is strong enough to keep at a BUY.

UltraShort MSCI Emerging Mkts ProShares (EEV) started off strong but closed the week lower as global financial markets proved to be a bit more resilient than expected. Because of the short-term nature of this pick, keep your eye out for “special alerts” which will recommend when to exit this position. It remains a BUY.

The iShares MSCI Hong Kong Index (EWH) ended the week exactly where it started. Because I expect weakness in the Asian markets during the next few weeks, Hong Kong is now a HOLD.

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SPDR S&P Emerging Markets Small Cap ETF (EWX) hit $41.77 last Friday, a record high for the year. The relative outperformance of this position remains strong, but I am keeping this temporarily at a HOLD.

The iPath DJ AIG Copper TR Sub-Idx ETN (JJC) reached a high of $41.03 as copper hit yet another high for the year on Friday. With the global economic recovery firmly in the cards, Dr. Copper remains a BUY

PowerShares Financial Preferred (PGF) is nudging back up toward the $15.00 level again. My technical indicators on this one are screaming BUY.

Claymore/AlphaShares China Real Estate ETF (TAO) jumped 6.4% this past week. Since this pick will sell off sharply on any pullback, TAO remains a HOLD.

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