The Global Bull Takes the Pain

Global markets swung wildly to both the up and downside, with the Dow Jones Industrial Average rising or falling at least 100 points almost every day. Ultimately, however, global markets ended the week sharply down, and U.S. markets broke their winning streak of seven straight months. This is especially frustrating as many of your positions had hit highs for the year as recently as Oct. 19. Two of your positions, the iShares MSCI BRIC Index ETF (BKF) and the iShares MSCI Chile Investable Market Index (ECH), had done so as recently as a week ago.

You were stopped out of Baidu, Inc. (BIDU) after its disappointing earnings announcement took the stock from $432.97 all the way down to a low of $353.03 on Tuesday. But BIDU quickly bounced back above its exit price, and held its ground reasonably well, even in the face of the wider sell-off in global markets later in the week.

You hit your stop of $34.50 in ICICI Bank Ltd. (IBN) last Tuesday after the Indian government announced higher reserve requirements for Indian banks. You were also stopped out of your two other volatile positions, including Brazilian small cap Gafisa S.A. (GFA) and Russia’s Mechel (MTL) later in the week.

The strategy moving ahead is a delicate one. One of the many first rules of trading is that when volatility spikes, as the VIX did by almost 50% last week, its best to pull in your investment horns. This is the time that investors rush to the safety of asset likes the Japanese yen in the form of CurrencyShares Japanese Yen Trust (FXY). But I don’t think there is much point in putting more of your money at risk until the dust settles.

At the same time, when global markets bounce after sharp sell-offs like the ones we’ve just experienced, they tend to do so hard and fast. For example, Mechel (MTL) soared 12.8% and Gafisa (GFA) jumped by 8% on Thursday’s market rally after the announcement of surprisingly strong GDP numbers.

Therefore, I am keeping our stopped-out positions on a “virtual watch list,” with an eye toward re-entering them relatively quickly. Overall, my view is that last week’s spike in volatility was one of “Mr. Market’s mood swings.” Once we are over this rough patch, I expect that global markets will resume their rally. At the same time, I am moving some of your other existing positions to a HOLD. You are quite close to your stops on some of your existing positions, and I urge you to stick to them if the market continues its downward leg.

Portfolio Update

The iShares MSCI BRIC Index ETF (BKF) hit a record high of $46.70 last Monday before pulling back. The relative strength of the Chinese market helped this position to stay above its stop price. BKF still remains a BUY.

The iShares MSCI Chile Investable Market Index (ECH) hit a high for the year of $50.80 last Monday and stayed better insulated from the global market turmoil than most other markets. Chile remains a BUY.

The iShares MSCI Israel Cap Invest Mkt Index (EIS) behaved much like Chile last week. In fact, many Israeli tech listings in Nasdaq were hitting 52-week highs, even as the rest of the market tumbled. EIS remains a BUY.

The iShares MSCI Hong Kong Index (EWH) fell about 5% last week, outperforming the broader emerging market index by a wide margin. Hong Kong remains a BUY.

SPDR S&P Emerging Markets Small Cap ETF (EWX) fell sharply last week, but surprisingly, still outperformed its large cap emerging market counterpart. I am moving this volatile bet on emerging markets temporarily to a HOLD.

First Trust ISE-Revere Natural Gas (FCG) fell sharply last week, along with the rest of the U.S. market. I am moving FCG to a HOLD.

The iShares MSCI Turkey Invest Mkt Index (TUR) pulled back last week, as you would expect from one of the world’s most volatile markets. Turkey is now a HOLD.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy.