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Since the markets hit 15-month highs on Jan. 19 (only 10 trading days ago!), we experienced the sharpest and most sudden pullback in global markets since they bottomed in March. We’ve had other brief pullbacks in the past 12 months — in June and October. This one was, however, sharper and more severe. It also happened just after markets had hit 15-month highs.
When investors panic, they throw the baby out with the bathwater. As a result, you have hit a lot of your stops over the past two weeks. This is, of course, frustrating — especially if this pullback turns out to be one of “Mr. Markets moodswings,” and not the beginning of a sustained downturn.
At the same time, I cannot overemphasize the importance of sticking to your stops. The last time we had a pullback of this magnitude was in July and August of 2008, when we were stopped out of every single one of our stock positions. As it turned out, this was the right thing to do. Ironically, Global Stock Investor had no such global stock positions when markets fell through the floor after the collapse of Lehman Brothers in September 2008.
The bottom line? When markets pull back sharply, your emphasis MUST shift toward the preservation of your capital. That means sticking to your stops, no matter how painful that may seem at the time. And this is more than theory. My managed accounts went from being fully invested to being one-third in cash virtually overnight. But I know that markets only have to completely collapse once to wipe out a decade’s worth of gains. And, that’s not a risk that you should take with your money.
So where does that leave your Global Stock Investor portfolio today?
I should point out that you had positions in the only two markets on the planet that ended January in the plus column, Market Vectors Indonesia ETF (IDX) and the iShares MSCI Turkey Invest Mkt Index (TUR).
This past week, you were stopped out of Chemical & Mining Co. of Chile Inc. (SQM) for a gain of 31.23%.
In addition, you were stopped out of the iShares MSCI Taiwan Index (EWT) for a gain of 17.04% and Arcelor Mittal (MT), our most recent pick, for a loss.
These latter two are particularly frustrating as we were stopped out right at or near our stop price before they turned back up.
But you’ve played this game before, and have re-entered positions successfully after previous pullbacks.
So this week, I am recommending that you re-enter the following positions with one-half of your normal position size: the Market Vectors Russia ETF (RSX) and Freeport-McMoRan Copper & Gold Inc. (FCX). Place your stops at $27.50 and $60, respectively
And, I am keeping VALE S.A. (VALE) and Arcelor Mittal (MT) on a watch list for possible re-entry in the coming weeks.
The WisdomTree Dreyfus Chinese Yuan Fund (CYB) was flat this week. I am keeping this actively managed currency at a HOLD.
SPDR S&P Emerging Markets Small Cap (EWX) rose slightly this week. But because Taiwan is such a high component of this ETF, I am keeping this at a HOLD.
iShares MSCI South Korea Index Fund (EWY) ended the week slightly lower. With Asia relatively weak in recent weeks, it remains a HOLD.
Market Vectors Gold Miners ETF (GDX) came within a hair’s breadth of hitting its stop price. With gold out of favor, I am keeping this at a HOLD.
Market Vectors Indonesia ETF (IDX) held up remarkably well during the recent turmoil, cementing its position as a BUY.
iShares MSCI Turkey Invest Mkt Index (TUR) rose 2.4% this week, even as other markets struggled. Turkey remains a BUY.
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.