The Double Whammy of Greece and China Stocks

Markets are used to all kinds of stressful events, and for the past year or so have taken the Greek debt crisis pretty much in stride. Up through last week, what we saw in the market was an unemotional averaging out of all investors’ estimates of the probability of a Greek default and the likely fallout (including Greece’s exit from the Eurozone).

But as good as markets are at rational discounting in the face of a crisis, they are definitely not good at handling two crises at once. So when the Chinese stock market began to implode last week—the result of a year of speculative buying by Chinese investors and the government’s unexpected tightening of margin requirements—the result was extreme. Like a man under attack from a pit bull at his ankles and a swarm of bees around his head, a bit of panic was understandable.

The reaction from alarmed investors has pulled all of the major market indexes below their 25- and 50-day moving averages and back into the lower parts of their multi-month trading ranges.

For China and emerging market investors, this drop has been especially dramatic, as this chart of the PowerShares Golden Dragon Halter USX China ETF (PGJ) shows. (The Golden Dragon tracks Chinese stocks that trade on U.S. exchanges as ADRs.) How long will this correction last and how deep will it go, I don’t know, and neither does anyone else, even if they’re willing to offer predictions anyway. I’ve advised my readers in Cabot Emerging Markets Investor to sell two stocks and place three others on hold in response.


The chart shows quite clearly that March–April blastoff in those shares and the bumpier follow-through gains in May and June. The selloff last Friday and today is quite emphatic, and shows what happens when a two-front attack triggers investors’ flight reflex.

How long will this correction last and how deep will it go, I don’t know, and neither does anyone else, even if they’re willing to offer predictions anyway.

The important thing now is to cut your losses short, take at least partial profits in any emerging market stocks in which you still have them and avoid most new buying. There will be plenty of bargains around when this flood of negativity subsides, but trying to call bottoms in either the market or individual stocks is a loser’s game.

For Chinese stocks, capital preservation is the name of the game now. Once you have trimmed your portfolio’s sails to meet this new storm, you can relax and start building your watch list from among the casualties. But don’t even think of just holding onto everything and hoping that things will turn around quickly. Instead, respect the market’s action by raising some cash and keeping your stocks on tight leashes.

Paul Goodwin can be found on Google Plus.

Stock Picks

Loews Corp.

This undervalued stock has strong future earnings growth expectations.


Biogen is the market-share leader in treating multiple sclerosis.


One of Paul Godwin’s favorite stocks in his Cabot Emerging Markets Investor portfolio.

Cabot Wealth Advisory

Does Alibaba (BABA) Stock Measure Up to Amazon (AMZN)?

By Paul Goodwin on September 23, 2016

Alibaba (BABA) is the Amazon (AMZN) of China. But does BABA stock measure up to AMZN stock? Let’s break it down!Read More >

As Stock Market Trends Change, Invest in these New Leaders

By Michael Cintolo on September 22, 2016

History tells us that all stock market trends change, and if you don’t recognize the leaders of that change early, you risk missing out on the next big winners.Read More >

AMZN Stock vs. FB Stock: Which Is the Better Value Buy?

By J. Royden Ward on September 20, 2016

For the past five years, AMZN stock and FB stock have been two of the market's great growth stories. But could you make the case that either stock is still undervalued? Let’s break it down.Read More >