Although the constant noise from the 24/7 news cycle has made managing your portfolio more challenging, MoneyShow's Tom Aspray counsels that you shouldn't let this detract from your overall investment strategy.
It was a rough week in the stock market as the major averages saw the heaviest selling since last September when investors were disappointed at the Fed's decision not too taper. The government shutdown in early October caused many others to sell in a panic just before the market bottomed.
The latest catalyst was the poor economic news out of China, which spurred liquidation in many of the emerging markets, further depressing their currencies. Several notable earnings' misses from several stocks, like International Business Machines (IBM) and Kansas City Southern (KSU), made many nervous about their portfolios as KSU was down 14% on Friday.
It has consistently been my view that any news-related event or economic report (excluding war) should not be a reason to alter your overall investment strategy. There have been countless articles and data points over the past three years that warned of a hard landing for the Chinese economy.
I have highlighted some on the chart, as in early May of 2012, news that Chinese manufacturing was slowing hit a market that had already turned lower. By the end of the month, concerns over the Eurozone had also surfaced. The bearish sentiment continued to rise as many regretted not selling at the start of May.
According to AAII, the individual investor was worried as the bullish % dropped over 20% in just two months. In early June, there were technical signs that the stock market had bottomed out.
The market was rattled again in September of 2012 by disappointing news from China and some columnists were looking for their economy to crash because of overcapacity. The poor action by market leader Apple, Inc. (AAPL) helped to accelerate the decline.
The US market has not been immune to China shocks in 2013 as a plunge in the Japanese market on May 24 was a reaction in part to more weak manufacturing data out of China. But just a month later, the correction in the US market was over as it was no longer overbought (see chart). The weekly on-balance volume (OBV) on the bottom of the chart has continued to make higher highs, line a, since early in 2012.
There is no question that it has been a rough few months for the Asian markets as since the October 9 low they have lagged behind the Spyder Trust (SPY), which is now up about 8.8%. Thailand (THD) has done the worst of the group, down over 13%, and the Philippines (EPHE) has also been weak since November.
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The recent plunge in China (FXI) puts it down 8% and even the hedged Yen Japan ETF (DXJ) has lost almost 5% in just a week or so.
In last week's column, Souring Sentiment Will Help Stocks, I discussed how the sentiment needed to become more negative in order to create a good buying opportunity. Last week's action is a step in the right direction as despite the market bullishness in December, I thought that the risk was high and that only selective buying was warranted.
The sharp drop in the stock market has caused a surge into the bond market as the yield on the 10-year T-note has dropped from just over 3% at the end of 2013 to 2.72% this week. The key support is now at 2.48% and a weekly close in yields below this level will suggest a drop down to the 2.2% area.
The MACD-His did form a negative divergence at the late 2013 highs (line a) and does favor lower yields for now. As I mentioned in my recommendations for 2014, I forecasted that yields would be higher in 2014. This was based on the completion of the 18-month reverse head-and-shoulder bottom formation last May.
On a year to year basis, I think that rates are going to be higher as this bottom formation is more significant technically than the recent top. The lower yields will provide some relief for bond holders and may be what the homebuilding stocks need to turn higher again.
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