Mr. Market’s Mood Swings Unsettle Global Stocks

Mr. Market’s mood swings continued this past week, as global markets ended down for the second week in a row. The S&P 500 dropped 1.73%, the NASDAQ fell 1.25% and the MCSI Emerging Markets Index dropped 2.82%.

The biggest gainer in your Alpha Investor Letter portfolio was Berkshire Hathaway (BRK-B), which rose 1.02% and hit a new all-time high. Visa Inc. (V), Two Harbors (TWO) and iShares MSCI Ireland Capped Investable Market Index (EIRL) all managed to stay flat. All have substantial upside in the months ahead.

Your remaining position in Japan, the WisdomTree Japan Hedged Equity (DXJ), continued to fall and moved to a HOLD. PowerShares Global Listed Private Equity Portfolio ETF (PSP) and WisdomTree Emerging Markets SmallCap Dividend Index (DGS) also fell below their 50-day moving averages and have now moved to a HOLD.

Most annoyingly, you were stopped out of your position in Singapore SmallCap Fund MSCI iShares (EWSS) even as it ended the day up 2.11%, in some highly unusual — perhaps even suspect — trading on Monday.

As I am still very bullish on Singapore after my recent visit there, I am going to recommend that you re-enter your position in EWSS, placing a very wide new stop at $27.00. This is to keep you from getting whipsawed in and out of this high-yield position. Last year, there was also a (relatively small) dividend payment on June 21, and I don’t want you to miss out on that. I have recently added to this position in my personal accounts as well.

Since the Japanese market’s swoon in May 23, global market sentiment has turned quite sour. Nor does the picture look better based on overnight trading. Asian shares hit 2013 lows on Wednesday amid uncertainty over when the Federal Reserve would begin trimming its massive stimulus program. In the last two weeks, the Japanese market is now back to levels it last saw on April 8.

As I pointed out in yesterday’s edition of The Global Guru, I do think that the recent pullback reflects more a shift in investor sentiment than a change in underlying conditions. The Fed merely highlighted that at some point it will have to wind down quantitative easing. It has not actually done so. So, it is more the initial shock of this realization that has caused Mr. Market’s mood swings. From a technical standpoint, many markets are oversold and, from a trading perspective, are due for a bounce.

Here are two technical indicators — slow stochastics and Bollinger bands — that I use for timing entries in my short-term trading services which illustrate that emerging markets as a whole have not been this oversold since November.

Note that more often than not, once markets reach such oversold levels, they tend to bounce strongly in the next few weeks.

Portfolio Update

Berkshire Hathaway (BRK-B) gained 1.02% for the week. BRK-B bounced up from the 20-day moving average (MA) last week, as it has done every time since November 2012, and hit a new 52-week high. Warren Buffett has been selectively buying financial stocks since last summer, and these now make up 40% of his holdings. Recent financial acquisitions include positions in Wells Fargo, U.S. Bancorp and 11 other smaller financial firms and financial technology companies. BRK-B is a BUY.

Visa Inc. (V) was flat last week. Visa’s sideways trading pattern persisted for a fourth week last week. Oppenheimer maintained its “Buy” rating on Visa this morning, as well as on MasterCard, raising Visa’s price target to $200 — 11% above Monday’s close. V is a BUY.

PowerShares Global Listed Private Equity Portfolio ETF (PSP) dipped 1.71%, slipping just $0.02 below its 50-day MA. PSP has maintained its position above the 50-day MA for 50 of the past 52 weeks. The dip below this support level is temporary and more a function of current negative sentiment in the broader markets. PSP is now a HOLD.

S&P Global Timber & Forestry Index Fund (WOOD) lost 4.50% last week as it continued to follow the real estate sector lower. However, the current pullback is likely just a blip in the current multi-year recovery of the housing market. Housing construction always requires vast amounts of lumber, and demand for lumber should continue as such for quite some time to come. WOOD is a HOLD for now.

Wisdom Tree Japan Hedged Equity (DXJ) fell 5.67% last week. Japanese markets have experienced a short-term correction over the past two weeks, and DXJ has suffered accordingly. The RiverFront Investment Group is one of the largest holders of DXJ, owning 2.2% of outstanding shares. The big shareholder is holding firm, characterizing the recent slide as a healthy pullback. DXJ is now a HOLD.

WisdomTree Emerging Markets SmallCap Dividend Index (DGS) gave back 3.28% last week. This move was in line with its broader and less volatile cousin, the MCSI Emerging Markets Index (EEM). DGS also fell below the 50-day MA early last week and is now a HOLD.

Two Harbors (TWO) was flat last week as it dipped briefly below its long-term support level of $11.00. In addition to a recent analyst upgrade from “Neutral” to “Buy” last week, two of TWO’s directors reported a total insider purchase of 15,000 shares on April 24. As the old saying goes, “Insiders sell for many reasons, but they only buy for one.” TWO is a HOLD.

iShares MSCI Ireland Capped Investable Market Index (EIRL) ended the week flat. Most global stock markets have suffered a substantial pullback over the past month. However, Ireland remains relatively immune to the recent correction, as investors continue to bet on the “Celtic Tiger’s” continued recovery. EIRL is a BUY.

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