Global Markets Stumble but Here’s Your Strategy for Any Correction

U.S. stock markets pulled back about 2% over the past few days, with the Dow Jones ending the week down 0.29%; the S&P 500 falling 0.49%; and the NASDAQ tumbling 1.51%. The MCSI Emerging Markets Index held its ground for now and was up 0.67%.

Notwithstanding the slight market pullback, there were a couple of solid gainers in your Alpha Investor Letter portfolio. The Market Vectors Gulf States Index ETF (MES) gained 2.64% and the iShares MSCI Frontier 100 (FM) rose 2.08%, offering a rare example of diversification in global financial markets.

Two of your positions, the Guggenheim Spin-Off (CSD) and Las Vegas Sands Corp. (LVS), fell below their 50-day moving averages and moved to a HOLD.

Berkshire Hathaway Class B Shares (BRK-B) moved back to a BUY. This position tends to shine when the rest of the market tumbles.

After such a strong and steady run, investors are wondering whether the past two days mark the beginning of a sustained market pullback.

Here is my perspective…

First, we have been spoiled. This year’s market melt-up has occurred with remarkably little volatility. The S&P 500 has moved by less than 1% a day for around 50 trading days to mark the longest such streak in 20 years. That has changed over the past two days, as the VIX index (the “fear index”) has jumped more than 10% each day. This is the first time in its history dating back to 1986 that it saw back-to-back gains of at least 10% coming off of a 52-week low.  But given how volatility has been, it probably feels a lot worse.

Second, expect to see the media roll out the permabears. Nouriel Roubini and Peter Schiff should be gracing the screens of financial television programs by the end of the day. They’ll be making comparisons to the 20% pullback in the S&P 500 in August 2011, after the S&P downgrade of the U.S. credit rating.

If so, that will be good news. After all, this permabear crowd has an almost perfect record as a contrarian indicator. If they get really bearish, expect the market to rally.

Third, remember that you already have a strategy in place to deal with this: just adhere to your stops. If the pullback is sustained, you may hit some of them. But I have intentionally kept these stops rather wide so that the turnover in the portfolio should remain relatively low.

In short:

Portfolio Update

Berkshire Hathaway Class B Shares (BRK-B) rose 0.77% over the holiday-shortened week. Among his very few tried-and-true investment strategies, Warren Buffett certainly understands the power of dividends and compounded returns. His 400 million shares of Coca-Cola produce a $122 million quarterly dividend (or $928 per minute). Through the power of simple dividend reinvestment, Mr. Buffett can watch this tremendous investment grow with a minimum of effort. BRK-B rose above the 50-day moving average (MA) last week to become a BUY.

Guggenheim Spin-Off (CSD) gave back 2.47%. CSD pulled back over the past two days, along with the broader markets. CSD had been pushing up against the significant $47.00 all-time high it has visited twice before over the past seven months. CSD returned to a HOLD yesterday.

The Blackstone Group L.P. (BX) fell 2.53%. Blackstone announced the completion late last week of its $5.4 billion acquisition of the Gates Corporation. Gates Corp. is a high quality company and a leading global maker of automotive power products, including belts and fluids. BX is scheduled to report earnings on July 17 before markets open. BX is a BUY.

Las Vegas Sands Corp. (LVS) lost 3.47% over the past four trading days. Analysts at Nomura see a bright future for LVS, calling for a 25% to 35% upside potential over the next year. They also expect improving sentiment throughout the summer months and believe any current pressure presents a good buying opportunity. LVS is scheduled to report earnings on July 23, after markets close. LVS fell below the 50-day MA last week to become a HOLD.

Market Vectors Gulf States Index ETF (MES) gained 2.64% last week. MES has been under pressure over the past few weeks as regional events have pushed this exchange-traded fund (ETF) lower. However, MES recently approached its 200-day MA and took a strong bounce, indicating a potential end to the pullback. MES remains a HOLD.

iShares MSCI Frontier 100 (FM) rose 2.08%, following in MES’ footsteps. FM took a convincing bounce two weeks ago and has continued higher, stopping just pennies shy of its 50-day MA yesterday. Frontier markets have outperformed their better-known emerging markets counterparts this year. This pullback is likely a healthy correction needed to push FM to higher levels over the coming months. FM is a HOLD for the moment.

Latest Special Report

I encourage you to read the newly updated version of The Top 12 Stocks You Should Buy Right Now, which features three of my top investment recommendations for the second half of 2014, as well as bonus picks from each of my fellow investment newsletter editors at Eagle Financial Publications.

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