Things Have Turned Ugly

Things have turned ugly in China, which leads us to turn very defensive. Four days ago, hoping to get the volatility of Chinese stock markets under control, the China Securities Regulatory Commission (CSRC), the Chinese equivalent of the SEC, instituted a circuit breaker mechanism that would allow them to shut down trading if declines reached a trip-wire level. That circuit breaker has been used twice now, including this morning and the reaction has been so negative that the CSRC announced on Weibo today that the circuit breaker mechanism was being suspended.

Monday’s global equities selloff was partly the result of the implosion in Chinese markets, which was, in turn, partly the result of negative economic news about the Chinese economy. Today’s meltdown in Chinese markets is having a similar effect. And the Chinese central bank’s devaluations of the yuan, which are an attempt to shore up the Chinese export economy, is adding to the chaos by raising the specter of capital flight from China. The devaluations also suggest that the government’s stimulus program isn’t getting any traction, and that’s a little chilling in itself.

But in a larger sense, knowing why a market move takes place is just an intellectual game. The important thing is knowing how to react, and that’s a matter of making decisions about the individual stocks in your portfolio.

Today, as always, we are reviewing our holdings and making those decisions about our stocks. You should be doing the same with all the growth stocks in your portfolio, making individual decisions about each of them separately. Don’t take a shovel to your portfolio when a pair of tweezers will do. But don’t fail to take action. Markets love a stationary target.

The iShares MSCI Emerging Markets ETF (EEM), which tried to bounce in mid-December, has been correcting hard, and is now nearly back to its August Meltdown lows. PowerShares Golden Dragon (PGJ), which rallied nicely right through December 24, has rolled over, dropping below its 25- and 50-day moving averages on heavy trading volume. Thus, our Emerging Markets Timer’s red light is joined by a similar signal from the ETF that tracks Chinese ADRs. We are adjusting the portfolio accordingly.

The major indexes started the day on the downside and got weaker as the day went on. The selloff was broad, and at the close, the Dow was down 391 points (-2.3%), the S&P 500 down 47 points (-2.4%), and the Nasdaq lower by 146 points (3.0%). The iShares MSCI Emerging Markets ETF (EEM) fell 95 cents (-1.0%).

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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