There’s been a massive sell-off in stocks. Because of this, you might be tempted to pile back in. However, Dominic Frisby thinks that this would be a big error.
Wait until September is over
Dominic notes that there is a famous, old stock-market saying: “Sell in May and go away, come back on St Leger’s Day [15 September]”. The American version “recommends that we go away ‘until Labor Day’. That’s the first Monday in September”.
What’s more, the Dow Jones index “has sold off by almost 1,000 points since its highs of early August. This means that, “a September entry certainly looks very tempting”.
However, “before you pile in”, it might be a good idea to look at how shares have tended to perform in September. In the 127 years since the Dow Jones index began in 1886, “the market has still fallen by 1% during the typical September”.
More recent data tell a similar story. Analyst Dimitri Speck studied returns in the last 30 years and found that, “in a typical year, the best gains are seen from late October through to May”.
All in all, “September is, on average, a rotten month”. Indeed, he thinks that you “should wait out most of October as well – not least because October tends to be the stock-market crash’s favourite month”.
Such a cautious strategy “looks particularly sensible this year”. The reason is that “the Dow in 2013 has been on such a tear that it has not once gone back to its 252-day moving average (252-DMA). That’s its average price over the previous 252 trading days (there are 252 trading days in a year)”.
This is important because, “I had a look at a chart of the Dow over the last four years. In each of those years, it has returned to its 252-DMA. Then I looked at a ten-year chart. Then a 15-year chart. Then a chart going back to 1980. The only year I could find when the Dow didn’t go back to its 252-DMA was 1989!”
Overall, Dominic thinks that there will be another fall. “My money says we’ll revisit that red line before the end of October, perhaps even by St Leger’s Day (although I doubt it). That is to say, this correction will take the Dow Jones back to the 14,000 to 14,200 area, or perhaps lower at 13,500, before its next phase begins”.
Time to rethink your portfolio
John Stepek agrees that US shares could be due for a dip. He notes that professor-turned-money-manager John Hussman thinks that markets could go down by as much as half.
John notes that Hussman uses a variety of measures, including sentiment and charts. However, Hussman is particularly worried about the fact that stocks are very expensive. “Using the cyclically adjusted price/earnings ratio (the Cape, or Shiller p/e), the S&P 500 is over-valued compared to its historical average”, he says.
Overall, the only thing preventing an immediate crash “is faith that central banks are in a position to save us all”. Indeed, “as John Mauldin puts it, ‘faith in central banks today is equivalent to faith in the word dot.com in 1999, or faith in the eternal rise of housing prices in 2006’.”
As John Stepek points out, this makes the market vulnerable, since, “it wouldn’t take much for that faith to be shattered”.
“So what can you do about it?” asks John. He thinks that it’s important not to panic. “Selling everything you own and going into cash is a drastic move, particularly if the crash you’re hoping for doesn’t materialise”.
Instead, a calm approach might end up working much better. His advice is therefore to, “make sure that you’re comfortable with the way your portfolio is positioned right now”.
Specifically, you should, “look at each of your holdings – individual stocks, whole markets, investment trusts, whatever – and remind yourself of why you bought it”.
If you think a holding is “good value” and “would relish the opportunity to buy more” if it fell in price, you should “hang on”. “I’m not too worried about my investments in Italy right now,” he says. “Unlike the US, which is historically overvalued, Italy is already cheap. If it falls further, it just gets cheaper”.
However, he warns that “if you bought a stock (or a market) on a wing and a prayer, in the hope it would keep rising, now’s probably a good time to take profits”.
One rule of thumb for telling the difference between the two types of investment is to “imagine how you’d feel if the price fell by 25% from where it is today”.
This means that “if you would be excited by the buying opportunity, hang on to it”. However, “if you’d feel a painful stab of regret at not cashing in, then sell it”. This would let you “hold on to the cash in the hope of being able to put it to work at a later date, if and when prices do indeed topple”.
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Chinese clampdown on corruption
In her blog, Merryn Somerset-Webb returned to the topic of China and luxury goods. “Looking at the recent news, you do have to wonder how much longer the myth that there is easy money to be made in China can continue”.
The big development is the trial of Bo Xilai, which has “laid pretty bare the level of corruption that has allowed the Chinese elite to live stunning lavish lives over the last decade or so”. Such action “isn’t exactly much good for conspicuous consumption in China”. Throw in the economy, “and you might wonder how luxury sales can keep rising across the country”. As Merryn bluntly concluded, “the answer is that they can’t”.
Indeed, a report by J Capital Research suggests that, “sales across the board are down “20-30%” this year. In the city of Ningbo, there are “plummeting sales of luxury products from fashion to wrist-watches, liquor to autos”. While the official numbers are “still seemingly good”, this is because “managers know that share prices rise with accelerating sales, so as is the case with the government, “the target will be met, one way or another.”
All this is leading to a big increase in unsold stock. In the car industry, “some dealers are carrying four to five months of inventory”. Overall, she warns that “it wasn’t that long ago that there were long waiting lists for those who wanted to buy luxury vehicles in China. I don’t think we will see their like again for a while”.
Reader David Webb thinks that the problem isn’t just limited to the Chinese mainland. Indeed, “the UK is a willing launderer of the money obtained in illegal ways by the Chinese elite”. While many Chinese officials own British property, “a look at their salaries would show they couldn’t possibly have accumulated that amount of money legally”.
One gold miner to watch out for
While Chinese consumers are no longer buying luxury goods, they are still eager to buy gold and gold jewelry – especially after this summer’s fall in prices.
As I noted in yesterday’s Money Morning, “the Chinese have also gone on a gold-buying spree. According to the World Gold Council, demand for gold jewellery went up by 54% year-on-year in the second quarter”.
Indians have also stocked up. “Despite government attempts to limit imports, including extra tariffs, the amount of gold imported into India rose by nearly half in the first half of this year. Given the catastrophic performance of the rupee this year so far… you can see why your average Indian consumer would rather have at least some of their savings sitting in a barbarous relic like gold”.
Since Asian demand was a big factor in the original bull market, this suggests that “there’s always a place for gold in your portfolio”. After all, “it’s the best insurance against a mass loss of faith in the financial system, which remains a serious threat”.
It has “also flung up some very interesting opportunities in the gold mining sector”.
“One share that looks particularly good value to me, is South Africa’s DRDGOLD (NYSE: DRD)”. DRD focuses on “treating the discarded rubble left by existing mines. This enables the company to extract any gold left behind after the original mining process, with a relatively high degree of confidence. The company is now also using nanotechnology to boost yields even further”.
“Thanks to its relatively generous pay packets, which include a profit-sharing scheme, the company has largely avoided the round of strikes that have hit production in the rest of the South African industry”. It is also “thinking about using similar techniques to extract uranium as well, which would broaden its revenue stream”.
Best of all, “the stock is still extremely cheap. It currently trades at 7.9 times earnings. It also offers a solid dividend yield of 4.5%”.
Of course, we’ve covered this sector before. Indeed last month, we did a feature about gold miners. Also, my colleague Simon Popple writes a newsletter devoted to opportunities in precious metals miners – you can find out more about it here.
Another crisis is inevitable
Tim Price is also bullish on gold. His main reason is that he thinks another financial emergency is “inevitable”. Instead of being solved, “the financial crisis is morphing into a political crisis”. Overall, he thinks “the fundamentals are still disastrous for unbacked money and for bondholders who have loaned fiat money”.
Of course, sticking with gold is difficult, given its poor performance over the past year. Indeed, “when the price of any asset falls as gold has over recent months, it is human nature to question it. If that asset was a stock or a bond, you might do the difficult thing and cut your loss”.
However, “gold is unique in that it has neither credit nor counterparty risk. This is important because the financial and monetary systems are under severe strain”. Therefore “it is possible to view the sell-off somewhat more dispassionately”. He also reminds us that “we have been here before. The correction in the gold price that began in September 2011 resembles the correction that gold suffered between 1974 and 1976. Despite that correction, gold subsequently rose to new highs”. Read the full article here.
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