Preserve Capital (and Confidence!)

by Paul Goodwin on October 16, 2014

This is an excerpt from Cabot China & Emerging Markets Report, which seeks to capitalize on the big boom in China and other emerging market countries. Editor Paul Goodwin, Cabot’s international investing guru, provides your passport to profits.

The market again opened sharply lower after a poor overnight showing from foreign markets and continued worries about the global economy. But stocks found some support for the second straight day, helped by comments from a Federal Reserve member that the end of QE could be delayed in the U.S.

The overall market’s trend remains down, and there’s been a ton of selling in emerging market stocks since our Emerging Markets Timer sell signal in the second half of September.

In the short-term, we’re seeing many signs that the selling pressures might be exhausting themselves—yesterday morning brought panic selling and a massive number of stocks hitting new 52-week lows, and, of course, most stocks are very stretched to the downside. The fact that the market found support today after another big gap down (the S&P 500 was down about 2% at 10 am) is another positive.

None of that means we’re advising buying into any bounce, but, if you’ve already built up a lot of cash, it’s probably not the best time to sell a bunch of stocks. In fact, we’ve already seen some nice bounces during the past day or two, despite the volatile action of the indexes.

On an intermediate-term basis, it’s going to take more than a couple of up days for a new uptrend to get underway. Even if we have hit a low in the market, it’s very likely we’ll see a few weeks of bottom-building (likely involving a re-test or two of the market low) before a sustained upturn.
All that said, what really counts now isn’t forecasting what’s to come, but just recognizing the current environment (short-term oversold, but more importantly, intermediate-term downtrend) and staying in a defensive stance. If and when the trend turns up, we’ll see it, along with all the stocks that are in pole position to help lead that advance. Right now, though, the focus is more on preserving capital (and confidence!) as we patiently wait for the bulls to re-take control.

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