Extreme Market Uncertainty May Signal Gains Ahead

Nicholas Vardy

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

Global stock markets were broadly flat over the past week, with the Dow Jones down 0.08%, the S&P 500 treading water and falling 0.03% and the NASDAQ pulling back 1.11%. The MCSI Emerging Markets Index rose 0.17%.

Big gainers in your Alpha Investor Letter portfolio included PayPal Holdings (PYPL), which rocketed 15.20%; Google Inc. (GOOGL), which jumped 6.42%; and the iShares MSCI Philippines (EPHE), which added 2.24%.

Both Google Inc. (GOOGL) and PayPal Holdings (PYPL) moved back above their 50-day moving averages to a BUY.

The level of uncertainty in the markets is historic. Most sessions have been all or nothing, swinging between extreme optimism and pessimism.

According to research published by sentimentrader.com, four of the last seven days had 85% of volume flowing to either the bull or the bear side. Over the past six months, a remarkable 29 days have seen such extreme swings. That’s one of the highest totals since the S&P 500 was launched in 1957. Since then, there have been only 10 other similar periods of all-or-nothing behavior. With one exception, these occurred late in a bear market or late in a correction. And with another single exception in 1962, this type of behavior led to higher prices both one month and six months later. The average gain after six months was 14.2%.

Like turbulence in an aircraft, the market’s volatile action can be very unsettling.

Two things should help alleviate your fear.

First, based on these historical precedents, you can expect further swings of extreme optimism and pessimism in the coming days. But odds are high that the outlook will be brighter in six months’ time.

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Second, smart money like Warren Buffett is out there buying stocks hand over fist. In doing so, Buffett is following his own advice of “be greedy when others are fearful.”

Portfolio Update

Markel Corp. (MKL) traded sideways last week, marking time along with the lackluster movements of all the major indexes. Markel’s core business is insurance. However, the company also focuses on acquisitions, adding cash-cow businesses through its Markel Ventures. Although MKL’s earnings reporting date has not been announced yet, MKL is estimated to report between Feb. 10 and Feb. 15. MKL is a HOLD.

Google Inc. (GOOGL) jumped 6.42% last week and hit a new all-time high after reporting earnings on Monday. Alphabet’s earnings per share (EPS) came in at $8.67, beating the consensus estimate by $0.58. Revenue was $21.33 billion, beating the estimate by $0.5 billion, and rising 18% year over year. And in the biggest news — with this earnings report, Alphabet officially became the world’s most valuable public company, beating Apple’s $529 billion market cap by $18 billion. GOOGL moved above its 50-day moving average (MA) and is now a BUY.

WisdomTree Japan Hedged Equity ETF (DXJ) moved higher last week despite stagnant markets, rising 1.32%. Japan also pushed its interest rates slightly negative last week, pushing the yen down even further and boosting Japanese currency-hedged investments. WisdomTree analysts released the following: “We believe Japan is likely to remain a focal point for investors in 2016. The Bank of Japan (BOJ) added to its already aggressive monetary easing program in January. This recent action should also keep currency-hedging strategies in focus as the divergent monetary policies between the BOJ and the U.S. Federal Reserve are likely to put renewed pressure on the yen.” DXJ is a HOLD.

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PayPal Holdings (PYPL) reported earnings on Jan. 27 and then proceeded to rocket 15.20% higher during the week. PayPal posted $0.36 earnings per share (EPS) vs. the average analysts’ estimate of $0.35. Revenue rose 17% to $2.56 billion vs. an estimated $2.51 billion. PayPal also added 6.6 million active customer accounts, up 3.8% from the last quarter, bringing the total to 179 million. The company also announced a $2 billion stock repurchase program. PYPL changed to a BUY.

Allergan plc (AGN) fell 5.06%. According to FactSet analysts polling, AGN falls on a short list of the four S&P 500 stocks for which “all analysts polled have warm and fuzzy feelings, with “buy” or “overweight’ ratings.” AGN will report earnings on Feb. 22 before markets open. AGN is a HOLD.

iShares Currency Hedged MSCI Germany (HEWG) lost 3.42% over the past five trading days. Europe’s monetary easing remains in force for the foreseeable future as a method to energize the region’s economies. Germany, in particular, is primed to benefit from easing as its exports will be lifted by the weak euro. Recent inflation figures for Germany also remain quite positive for a future recovery. HEWG is a HOLD.

Nicholas Vardy

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