I am sure that the past weeks have been disastrous for many investors as very few had seen this drop (and its timing) in the stock markets coming. Even those who did saw it coming may not have expected it to be this fierce.
I think I may include myself in that last category. With the lion share of my portfolio invested in American stocks and a long gold position, this week has certainly been one that I do not wish to experience a second time. My long position in gold has been liquidated and I was too early to close my short position on the Dutch AEX index, which generally follows the US indices.
Now is the time to sit and think about what steps to take. Do I sell my shares, waiting for further drops? Do I move extra money into my trading account? Do I sit and wait until the bottom is there, knowing that current valuations are ludicrously low? This is probably a choice that many private investors are now thinking of and their decision partly determines the future course of the markets.
Let's have a look at the signs that we're getting. The move that we've seen since the year-highs was fiercely downward, then sideways, then fiercely downward again. Corrections like these are never ended with a sideways move. They always end after a last fierce sell-off, followed by a quick rise.
The first downward move was mainly caused by financials that were (or were not) affected by the subprime woes. The second downward move, the one that we're in now, was not caused by financials - even though all newspapers, television stations and websites will tell you that investors are selling on subprime fears. And the financial sector is the only one that is going up again!
The main sectors that are now hit are services, basic materials and to a lesser extent, the energy sector. These are the sectors that had not yet had serious sell-offs and investors are now simply taking profits, based on fear or emotions if you like. In addition to that, the carry trade has its effect as well, which has affected precious metals prices as well.
All this means that you're now able to buy dividend cannons like Southern Copper at a p/e below 10; a growth company like Companhia Vale (NYSE:RIO) at a p/e of 9 and Freeport-McMoran (NYSE:FCX) at a p/e of 8.4. And these are not companies that have performed badly so far this year! This Thursday's sell-off also means that telecom stocks are reasonably priced again, even though this is not one of my favorite sectors. It means you can buy Apple (NASDAQ:AAPL) at $112, where hardly anything's changed since everyone wanted the stock at $140. (I personally continue to think that it's crazy to pay over 30 x earnings for any company, unless it's a junior company with great prospects, but I seem to be the only one.)
All I can say is that today we are one step closer to a turnaround, which doesn't necessarily mean that 12500 was the bottom for the Dow. There may be a further drop, but I am pretty confident that we will not see a drop as fierce as the one we saw this Thursday. Profit has now been taken in the sectors that are fundamentally the strongest sectors, and these best-performing sectors are the last ones to get hit.
From this I can conclude that the bottom is near. I will therefore not sell any of my stocks and wait for better times to come, however painful this may be. The only thing one can do is write some calls or buy some puts, just in case we haven't seen the bottom yet. I still think the precious metals are the sector to be in and especially gold. I will therefore look for a new long position in gold, once again with a stoploss. To all investors who felt the way I felt this week, hold on tight, start shopping again, but whatever you do, don't be the last one selling. After all the economy can't be that bad, because my fiancee's still out there shopping for shoes as if nothing changed this week...
Disclaimer: The author has no position in any of the above-mentioned stocks.