Holding on During the Pullback

Nicholas Vardy

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

After six weeks of essentially flat performance, U.S. markets broke through the downside last week, with the Dow Jones tumbling 2.85%, the S&P 500 dropping 2.52% and NASDAQ falling 2.02%. The MCSI Emerging Markets Index joined the sell-off and ended the week down 2.30%.

Despite the lousy week, you did have a handful of gainers in your Alpha Investor Letter portfolio. These included the Market Vectors Gulf States Index ETF (MES), up 1.55%; Markel Corp. (MKL), rising 1.10%; and India’s ICICI Bank Ltd. (IBN), gaining 0.99%. Berkshire Hathaway (BRK-B) and the WisdomTree Japan Hedged Equity (DXJ) each hit a new 52-week high.

The Market Vectors Gulf States Index ETF (MES) actually moved above its 50-day moving average and is back to a BUY.

In addition, you stopped out of your long-time holding in iShares MSCI Ireland Capped Investable Market Index (EIRL) for a 22% gain.

A number of your positions fell below their 50-day moving averages and moved to a HOLD. These include the WisdomTree Japan Hedged Equity (DXJ)Google Inc. (GOOGL)First Trust US IPO Index (FPX), WisdomTree Japan SmallCap Dividend (DFJ), Vanguard Global ex-US Real Estate ETF (VNQI)Global X Guru Index ETF (GURU), The Blackstone Group L.P.(BX) and the PowerShares Buyback Achievers (PKW).

The question on investors’ minds is whether this is the start of a major sell-off in the stock market. If you look at measures of market sentiment, investors are certainly running scared. CNN Money’s “Fear and Greed” Index stands today at 5. This suggests “extreme fear” in the market and is the lowest level since at least January — and probably back to August 2011 — the last time the market endured a 20% correction.

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Of course, this is a contrarian indicator, meaning that a very low reading is a buy signal. This current low market sentiment reading, however, also reflects how spoiled investors have become. With the S&P 500 still only 3.54% off its recent high, investors have been spoiled by the lack of volatility and the markets’ remarkably steady rise. For all the current handwringing, we are still a long way from any 20% correction.

One of the challenges for The Alpha Investor Letter portfolio during times like this is the placement of your stops. If the stops are too tight, you will be stopped out too soon and miss out on big future gains. If they are too wide, then you risk giving back too many of your gains once you do hit your wide stop.

On balance, I expect the current pullback to be relatively short-lived, and I am happy to keep your stops at their current wide level.

Portfolio Update

Berkshire Hathaway (BRK-B) gained 0.49% last week and spiked to a new 52-week high. Berkshire Hathaway reported record earnings to make second quarter 2014 the company’s most profitable quarter in its history. BRK reported earnings of $1.75 per share vs. a $1.66 analysts’ estimate. Total revenue increased 11.3% year over year to $49.8 billion. BRK-B is a BUY.

Google Inc. (GOOGL) fell 3.50%. Google and Apple have been struggling for several years with various dueling patent lawsuits. However, in a recent move that is a win for both companies (and for consumers of their products), Google and Apple agreed to dismiss all pending patent litigation in all countries except the United States. GOOGL dipped below the 50-day moving average (MA) and is now a HOLD.

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Vanguard Global ex-US Real Estate ETF (VNQI) lost 2.30%. Your bet on international real estate pulled back last week in tandem with the  broad market correction. Of the 46 global markets I track closely, 29 fell last month — several quite substantially. The global economic recovery is certainly not over. Since real estate ebbs and flows with local economies, international real estate should resume its move higher as well. VNQI changed to a HOLD.

Market Vectors Biotech ETF (BBH) dipped 1.40% over the past five trading days. Bucking the trend, the biotech sector held tight last week to essentially trade sideways. BBH made a recent quick recovery from a mid-July dip and continues to exhibit strength in the wake of  market weakness. BBH remains a BUY.

Market Vectors Gulf States Index ETF (MES) gained 1.55% last week. MES has been somewhat immune to the recent market rout and even managed to eke out a gain last week. If the wider market pressures lessen over the coming weeks, MES should pull out of its sideways trading pattern and resume its rise. MES rose above the 50-day MA last week to become a BUY.

PowerShares Dynamic Energy Exploration & Production ETF (PXE) fell 4.42% last week, even in the face of continued tensions in significant global energy producing locations — an action that normally spells higher oil prices. However, PXE is falling victim to simple supply-and-demand pressures as European and North American oil inventories are at upper extremes, leading to an unprecedented decline in oil prices. In fact, U.S. crude is now below the $100 per barrel mark. PXE is a HOLD.

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Markel Corp. (MKL) rose 1.10% last week as it made a quick recovery from a recent dip. MKL will report earnings today after markets close, and the analyst consensus is calling for $5.79 earnings per share. MKL’s recent rise pushed it above the 50-day MA to become a BUY.

Nicholas Vardy

Editor’s Note: New Feature! We appreciate that you may use two e-email accounts during the day, and we want to help you keep track of your investments as seamlessly as possible. As a value-added service, we will begin to send these alerts to your second email address if you would like. To add your second email address, send us an email from the account you received this hotline at with your name, zipcode and your other email address to customerservice@nicholasvardy.com.

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