A Smooth-Flying Market Encounters Unexpected Turbulence

Nicholas Vardy

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

After a see-saw start to the week with markets plummeting on Monday and bouncing strongly yesterday, they ended the week pretty much where they started. The S&P 500 rose 0.38%, while the MCSI Emerging Markets Index fell 0.93%.

Overall, your Alpha Investor Letter portfolio had a stronger week, with the Vanguard Global ex-U.S. Real Estate Index Fund (VNQI) jumping 2.44%, the Wisdom Tree Japan Hedged Equity (DXJ) up 1.96% and Berkshire Hathaway (BRK-B) rising 1.94%. I recommend that you raise your stop in WisdomTree Japan Hedged Equity (DXJ) to $40.00.

Two of your positions related to the U.S. housing sector — S&P Global Timber & Forestry Index Fund (WOOD) and Silver Bay Realty Trust (SBY) — dipped below their moving averages and moved to a HOLD.

Monday was a lousy day for stocks, with the Nasdaq tumbling 2.4% and the S&P 500 diving 2.3%. The major indexes endured their biggest losses of the year and their worst drop since November. Not a single member of the Dow Jones industrial average ended the day higher.

Monday’s drop was particularly notable compared to the market’s recent history of smooth sailing. Over the past three months, the S&P’s average daily change was under 14 points, while Monday’s decline was more than 36 points.

Yesterday, stocks took back most of the ground they lost on Monday. Volume was low, though, decreasing from Monday’s pace across the board. According to sentimentrader.com, when you see these kinds of moves, returns for the next couple of weeks historically tended to be weak and often re-tested the mini-panic low. Combine that with looming weak seasonality — remember “sell in May and go away” — and we may be in line for some choppiness over the coming months.

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That said, the major themes in your Alpha Investor Letter portfolio, the United States as “the best house in a bad (global) neighborhood:” Berkshire Hathaway (BRK-B), Visa Inc. (V) and PowerShares Global Listed Private Equity Portfolio ETF (PSP); the Japanese Bull run: WisdomTree Japan SmallCap Dividend ETF (DFJ) and Wisdom Tree Japan Hedged Equity (DXJ); and the U.S. housing recovery: S&P Global Timber & Forestry Index Fund (WOOD), Silver Bay Realty Trust (SBY) and Two Harbors (TWO), are all major investment themes which should continue to do well.

Portfolio Update

Berkshire Hathaway (BRK-B) gained 1.94% and hit a new 52-week high last week. Berkshire Hathaway’s annual shareholders’ meeting is scheduled for May 4, and investors have much to celebrate this year — as do you. Berkshire’s railroad holdings gained 16% and its energy investments added 10% for the year. Manufacturing, service and retail businesses collectively rose nearly 22%. BRK-B’s one-year gain to date is a hefty 35.5%. BRK-B is a BUY.

Visa Inc. (V) was flat last week. Lackluster earnings reports from both JPMorgan Chase (JPM) and Wells Fargo (WFC) put a damper on the financial sector last week, causing V to trade sideways for the week. The “big dip” that the Dow Jones took over the past two days did not help either. Visa Inc. will report earnings on May 1, after markets close. V is a BUY.

PowerShares Global Listed Private Equity Portfolio ETF (PSP) rose 0.53% over the past five trading days. PSP spent much of the past month slowly drifting lower, only to touch the 50-day moving average (50MA) and shoot back up to a new 52-week high early last week. PSP remains in an uptrend and appears well supported by the 50MA. PSP is a BUY.

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WisdomTree Japan SmallCap Dividend ETF (DFJ) added 0.77%. The Japanese recovery has been front and center lately, as Bank of Japan regulators recently announced aggressive stimulus plans. DFJ’s focus on dividend-paying small-cap firms, which are flourishing in the stimulus environment, has returned a winning 11.5% gain so far this year. DFJ is a BUY.

Vanguard Global ex-U.S. Real Estate Index Fund (VNQI) gained 2.44%. While the big news agencies have focused on the Japanese recovery over the past few weeks, housing has been charging silently ahead. Gaining nearly 7% over the past month, global real estate remains a winning theme in your portfolio. VNQI is a BUY.

S&P Global Timber & Forestry Index Fund (WOOD) dipped 1.21% last week. Commodities took a major hit on Monday, as gold took the brunt of the blow and timber got the axe. However, WOOD made an excellent comeback yesterday, coming to rest just shy of its 50MA. The case for the timber trade remains intact, and pullbacks like Monday’s are more apt to be buying opportunities rather than reversals of the trend. WOOD is a HOLD.

WisdomTree Japan Hedged Equity (DXJ) gained 1.96%. Although DXJ posted gains for the week, the recent short pullback in your two Japan holdings is one more signal to add to your positions. The Japanese bull is set to run for quite some time to come. DXJ is a BUY. Raise your stop to $40.00.

WisdomTree Emerging Markets SmallCap Dividend Index (DGS) gained 0.67% for the week. DGS is testing the $50 mark as a long-standing line of support. DGS’ big brother iShares MSCI Emerging Markets (EEM) is forming a similar pattern very near the 200-day moving average as well, signaling emerging markets are attempting a comeback. DGS is a BUY.

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Silver Bay Realty Trust (SBY) gave back 6.33% last week. SBY is pulling back as investors wrestle to get a foothold on the future of SBY and TWO. I outlined some of the finer points of their recent “stock as a dividend payment” action in my latest edition of the Alpha Investor Letter. SBY will report earnings on April 25, after markets close. Dipping below the 50MA, SBY is a HOLD.

iShares MSCI Ireland Capped Investable Market Index (EIRL) gained 1.21%. New figures from the Central Statistics Office (CSO) indicated that two-thirds of the value of Irish imports in February came from the European Union, with one-third coming from Britain, 9 percent from the United States and 6 percent from China. EIRL is a BUY.

Two Harbors (TWO) traded flat last week. Analysts from Credit Suisse recently met with TWO’s corporate executive officer and corporate investment officer. Their meeting was positive enough to reiterate Credit Suisse’s “Outperform” rating and state, “Two Harbors is well positioned to continue to deliver attractive risk-adjusted returns.” TWO will report earnings on May 1, after markets close. TWO is a HOLD.

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