Current Pullback in EM Stocks Looks Reasonable

 

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.



Stocks in the U.S. opened lower, partly due to a drastic fall in the Chinese stock market overnight. By day's end, the Dow was off 37 points and the Nasdaq lost 9 points, while the Golden Dragon Fund (PGJ) was off $0.51 (1.5%).

Today's downmove continues the general consolidation in Chinese and other emerging market stocks during the past four weeks—big investors seem to be "shaking the tree" to wear or scare out some late buyers. And, to be fair, there have been some stocks that have turned ragged and show abnormal action. You should be watching your loss limits and cutting loose any stocks that truly break down.

However, in the context of the prior huge advance for the Golden Dragon Fund and most Chinese stocks, the current pullback/consolidation looks reasonable—our Emerging Markets Timer remains bullish, as PGJ has only dipped back down to its 25-day moving average.  

Of course, we'd all prefer that our stocks go up every day, but that's not reality. And there's always the chance that this rally fizzles out, in which case we'll sell our weakest stocks and probably book some profits. But it's best to go with the evidence, and right now, the odds still favor the next big move being up.

A researcher and writer for over 30 years, Paul Goodwin has been a member of the Cabot investment team and chief analyst of Cabot China & Emerging Markets Report since 2005.

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