Wearing Out the Weak Hands

 
Wearing Out the Weak Hands

These Young People Today!

Waiting for the Tide to Turn on Renren

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I hope you won't take it the wrong way if I say that I hope you're feeling bad about how the market is acting.

It's nothing personal, and I certainly hope you've been following our advice and have the growth portion of your portfolio heavily in cash. I hate to see anyone (including myself) losing money in the market.

My hope that the market depresses you just reflects the reality of what it takes for a bear market to turn itself around, which is for a vast majority of investors to get discouraged and sell out.

This is a process that is often called "wearing out the weak hands," which is a term market insiders use to describe investors who don't have a lot of conviction.

Think of it this way. Strong hands are stock owners who know a company inside and out. They are sometimes company insiders, and sometimes long-term strategic investors who are willing to wait for years to let an investment thesis bear fruit. For people like this, a big bear market is just a clearance sale that offers wall-to-wall bargains. They are strong hands because they can hold on through anything.

But any big market downmove (and many little retreats, too) will always ratchet up the pain level on less-dedicated investors. Many of them are like me, which is to say they hold for relatively short periods of time and rely on the upward momentum of the market to deliver their gains. When the market goes down, and their stocks along with it, these investors head for the safety of cash.

The more disciplined investors (like me and the people I advise as the editor of Cabot China & Emerging Markets Report), recognize the signs of a bear market early and cut losses short. We head for the safety of cash and wait out the storm. (The portfolio of Cabot China & Emerging Markets Report is now 90% in cash, and has been more than 75% in cash for weeks.)

What the market is looking for, however, is the action of the people who have losses in stocks, but can't stand the thought of selling out and booking their losses. Or maybe they're just clinging to hope that the market will miraculously improve and bail them out without having to sell.

As a bear market lengthens (and deepens), these investors hold on like grim death. But the market is relentless and remorseless, and eventually these investors begin to give up in bursts of resignation, depression and anger.

This is what the market has been waiting for, and when the last of these weak hands finally gives up (which is to say that everyone who wants to sell has sold), the market can finally begin to put in a bottom.

I hope your portfolio is doing well. I hope you're making money, or at least not losing any. But when I say that I hope you're feeling bad about the market, I'm just hoping that sentiment is anemic enough to represent a market bottom.

Cabot China & Emerging Markets Report uses a proprietary market-timing indicator called the Cabot China-Timer. This indicator follows the action of the market, and it's been negative since Chinese stocks staged a short rally in July.

But market cycles always turn eventually, and with a huge correction under its belt, China will once again be turning its economic muscle into corporate profits. And investors will be breaking out their bags of cash again.

When that happens, I will be guiding subscribers to Cabot China & Emerging Markets Report to the hottest stocks in the developing world. To get started now, all you have to do is click right here.

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I have a theory about the relationship between parents and kids that occurred to me while I was still teaching, and it goes something like this: The members of every new generation have a responsibility to find a way to shock the [heck] our of their parents.

My generation did it by the now tried-and-true formula of sex, drugs and rock 'n' roll, but that's pretty much old hat now (as is the term "old hat"). As always, the big breakthroughs of the parents are passe by the time their kids hit their teen years.

Coming up with new ways to send parents into towering tantrums requires genuine creativity. The people in my age cohort used to think that the only way the next generation could shock us would be to turn into cheerleaders and conservatives.

Turns out we were wrong.

Sex was complicated by STDs. The drugs we were familiar with were replaced by particularly malignant new varieties. And the rock 'n' roll we knew morphed into punk, heavy metal and disco.

Thus, less than 10 years after the '60s ended (which wasn't until 1975, really), the world had changed into something my generation didn't even recognize, and didn't particularly like.

And if my theory is correct, this was completely inevitable, and has been going on since the world began. The Twenties crowd, the Depression Kids, The Greatest Generation, the Boomers, Gen X, Gen Y and the Millennials have all managed to get crossways with their parents' generations. And I mean seriously crossways.

I'm an extremely (maybe even excessively) tolerant person, without a lot of hot buttons to push. So the generations that followed mine have had to work hard to get under my skin. But they've managed it.

Right now, the objects of my astonishment are facial piercings and the wilder tattoos, but more tattoos than anything. The adornments worn in piercings can be removed and the body will erase the holes in short order. But tattoos are pretty much forever. And it seems to me that very few people will find their skull/snake/butterfly/dragon/Chinese character/bracelet of barbed wire body art as attractive when they are 60 as they do now.  

But I know that that's just the age talking. And when the pierced/tattooed generation has children, I can always take comfort in the thought that their kids will work just as hard--and likely just as successfully--to find a way to shock and dismay them.

It will be fun to watch.

This is not, to put it mildly, a good time to be investing in stocks. The winds and tides of the market are blowing resolutely against you, which reduces your odds of making any real money to worse than an ant's chances of making it across a freeway at rush hour.

Those tides and winds seem to be paying special attention to Chinese stocks, pulling even the most robust of them lower.

But a bad time for buying is a great time for working up a watch list, and Renren (RENN), one of the top candidates for the title of "the Facebook of China," is a great addition to any growth watch list.

Renren (the name means "everyone") is a social networking platform that encompasses four different sites. Renren.com is a standard social networking site that allows users to exchange messages, pictures, music and other user-generated content. Renren Game Center offers a wide variety of web-based games. Nuomi.com is what's called a social commerce site that features daily deals on merchandise, local services and cultural events, often using group buying to get great deals. Jingwei.com is Renren's newest site, a recently launched service focused on business and professionals.

Renren generates revenue from a mix of advertising and value-added services, and hasn't hit consistent profitability yet. But with over 124 million user accounts as of the end of June, there's a solid base to build on, especially considering that there are more people online in China than there are people in the United States.

RENN made a little pop when it came public in May, ripping from its IPO price of 14 to as high as 24. But it only took a day for reality to set in, and RENN is now trading resolutely under 6.

There are lots of reasons for this, including a round of accusations (many of them quite true) about fraud and misrepresentation in the quarterly reports of Chinese companies, the threat of interference from the government of China in any successful social media, and a general downtrend in the Chinese Internet sector after a huge runup.

Without minimizing any of those risks, I contend that these threats are already priced into the price for RENN, leaving the stock fairly priced as a representative of an out-of-style sector in an out-of-favor country.

But the trick isn't to try to figure out whether RENN is a good deal here. The market will determine that.

Once investors sort out the reporting issues and all the rest of the potential problems, RENN will be a popular choice for its enormous potential.

The time to start watching closely will be when RENN pushes back above its old support at 7.5 with rising volume. When sentiment shifts, RENN will have plenty of fuel.

You could buy RENN here and hope for the best or you could check out Cabot China & Emerging Markets Report, the top source for the best stocks in the world's fastest-growing economies. According to Hulbert Financial Digest, the Report has an annualized return of 9.7% during the last five volatile years (stomping the Wilshire 5000's measly 1.3% return)! Get started today.

Sincerely,

Paul Goodwin
Editor of Cabot China & Emerging Markets Report

Paul Goodwin can be found on Google Plus.

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