Charts Say Play Conservatively

 
Global markets have been taking their lumps as lower oil prices and uncertainty about the Chinese economy have shaken investors. The crucial factor to watch right now is whether investors have stopped believing that the Chinese government has a plan (and the resources) to get its economy stabilized and growing again. If that faith is intact, Chinese stocks will ultimately return to favor. If that confidence is lost, things could get ugly. As always, we’ll let the charts tell us what to do; right now they’re saying to play things conservatively.

Chinese markets have been devastated over the last few months, with the Shanghai Composite down well over 40% from its June 2015 highs. Chinese investors, having been burned by the collapse of stocks following the government’s ill-advised margin call last summer, are keeping their portfolios well clear of equities.

We have taken decisive steps to lower our exposure to all emerging market equities, selling down to our present 40% invested position. That leaves us with a heavy 60% cash position to use when markets get going again. And we won’t hesitate to do any additional selling that may be necessary to keep our losses small.

The major indexes rallied through the morning and finished the day on the upside, with the Dow leading the way. At the close, the Dow was up 115 points (0.73%), the S&P 500 gained 10 points (0.52%), and the Nasdaq rose a fraction of a point (0.01%). The iShares MSCI Emerging Markets ETF (EEM) gained 11 cents (0.39%).


This is an excerpt from Cabot Emerging Markets Investor, which seeks to capitalize on the enormous potential in emerging market countries. Chief Analyst Paul Goodwin has been a researcher and writer for over 30 years and a member of the Cabot investment team since 2005.

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Paul Goodwin can be found on Google Plus.

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