PHUKET: Pullbacks are great opportunities to see where the strongest stocks are, allowing investors to make a watch list of potential leadership stocks or sector ETFs that are holding up in the face of bad news.
Since early March, we have been seeing the S&P 500 undergo some consolidation involving a pullback. A 2-8 per cent pullback is perfectly healthy and normal, with anything higher being more unusual, but nothing to panic about.
This time around, we saw financial stocks getting hit the most. This brings us to about 30-35 per cent cash for clients’ long-term growth accounts.
Despite the increasingly scary news (such as North Koreans with nukes), we are still seeing individual leadership stocks staying strong, while weaker stocks are leading the pullback. For instance, the tech laden NASDAQ-100 index has barely budged downward since March and many of our core portfolio holdings, such as Apple, Netflix and Priceline Group, have continued to perform well.
Small cap biotech Theravance Biopharma is showing strength as shares have closed above their IPO level for retail investors and hit all-time highs. It also moved up 20 per cent during the March-April pullback as the ‘smart money’ continues to look for and invest in strong stocks.
Large cap Celgene Corporation has been bucking the S&P 500 downtrend by moving strongly in the opposite direction.
Mid cap life-sciences cloud-computing stock Veeva Systems has not even budged downward during the pullback. Not only has it closed back above its IPO level, but its shares keep hitting all-time highs.
China-based online behemoth Alibaba Group Holding is going strong. The stock is just waiting for some sort of catalyst (perhaps the next earnings report) to break even higher.
Large cap T-Mobile US is one that I am looking to buy as shares are holding up well throughout the pullback.
The iShares MSCI South Korea Index Fund ETF is also holding up surprisingly well in the face of North Korean nuclear threats. Now would be a good time for any investor with a strong stomach for geopolitical risk to consider buying it.
What I am waiting for is confirmation that the S&P 500 pullback will reverse itself, as what we saw before the US elections was a 2-3 month pullback and a breakout once the uncertainty was over.
On the other hand, if early March was in fact some sort of market top, our stocks will likely be stopped out one by one and fall below stop loss levels to be automatically sold.
If the market is unable to find support in the near term, then we will likely raise more cash, as I always ensure there are proactive stop loss levels in place where stocks will be sold if a key support level on the downside is breached.
Watch the shares of Google and Amazon; their quarterly earning reports show they are moving to new highs. The week after the French elections saw the 8-week correction ending and the uptrend continuing higher.
Don Freeman, the president of Freeman Capital Management, is a fee-only Phuket based Registered Investment Adviser with the US Securities Exchange Commission. He has 20 years of experience providing financial planning and wealth management advice with an emphasis on investing in low-cost ETFs to both working and retired expatriates.
— Don Freeman