Holding on For a Bounce

Last week was a tough one for U.S. markets, with the Dow Jones down 2.75%, the S&P 500 sliding 2.69% and the NASDAQ slipping 2.18%.

Surprisingly, the MCSI Emerging Markets Index was down only 1.61%, in a rare example of a U.S.-focused sell-off in the markets. For whatever reason, investors weren’t throwing out the baby with the bathwater just quite yet.

You did have a couple of gainers in your Bull Market Alert portfolio, including Russia’s Mobile Telesystems OJSC (MBT), which jumped 1.96%, and The Bank of Ireland (IRE), which climbed 1.17%. IRE also rose back above its 50-day moving average and is back to a BUY. Vipshop Holdings Limited (VIPS) also hit a 52-week high, before pulling back later in the week.

You were stopped out of Alcoa Inc. (AA) for a 10%+ gain.

Based on the poor earnings results of 3D Systems (DDD) published on Friday, I expect that you’ll be stopped out of this position at the market’s open today, especially after the stock was downgraded by several analysts.

Several other positions dropped below their 50-day moving average and moved to a Hold. These include Visa Inc. (V), ProShares Ultra Real Estate ETF (URE), Flextronics International (FLEX) and United Rentals (URI).

With last week ranking as the worst one for the S&P 500 since 2012, the bears are out in full force and market sentiment is now in extreme fear mode. Over the short term, it’s best to stay on the sidelines until the market settles, so I am holding off on making a new Bull Market Alert recommendation this week.

Ironically, the big picture isn’t as bad as the headlines would suggest. Markets tend to bounce strongly when investor sentiment reaches negative extremes.

That does not mean the market can’t go lower. But according to SentimenTrader.com, when we see downside shocks in the S&P 500 like we did last week, it has been more of a sign of a temporary dislocation than a coming implosion of financial markets. After a shorter-term downside follow through, stocks tended to resume the uptrend within a couple of months. Specifically, it took a median of five weeks and a maximum decline of 1.4% before the S&P closed at a new 52-week high.

The bottom line?

The market is likely to be choppy over the next couple of weeks. But after that, based on these technical measures, it has recovered almost without exception.

Portfolio Update

The Bank of Ireland (IRE) gained 1.17% last week. Over one of the worst market weeks in recent memory, IRE managed to issue a positive earnings report and make a gain. IRE reported its first profit since the Irish economic debacle began. Net profit for the first half of 2014 was $459.5 million vs. a loss of $621.5 million one year earlier. Impaired loan charges also moved in the right direction, falling to $596 million from $1.05 billion year-over-year. IRE moved above its 50-day moving average (MA) on the news and became a BUY.

Mobile Telesystems OJSC (MBT) added 1.96% last week as investors turned their attention away from overseas geopolitical concerns and focused squarely on the big drop in the U.S. markets. MBT is a HOLD.

iShares MSCI BRIC ETF (BKF) dipped 1.71%. The BRICs — Brazil, Russia, India and China — pulled back moderately last week, in tandem with the broader MCSI Emerging Markets Index (EEM), which fell 1.61%. However, this move was somewhat muted when compared to the larger moves of the domestic averages, as the S&P 500 Index (SPX) fell 2.69%. BKF is a BUY.

United Rentals (URI) fell 6.05% as the wide-ranging market correction affected most sectors adversely last week. URI’s domestic footprint is very large, with 883 rental locations in 49 U.S. states and 10 Canadian provinces. URI employs 12,400 people and rents $8.42 billion worth of equipment to customers ranging from construction companies, to utilities and municipalities, down to individual homeowners. Falling below its 50-day MA, URI changed to a HOLD.

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