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Global markets got pretty bumpy last week. And for the first time in 2015 investors were confronted with the possibility of a significant market correction.
We need only look at the action of the major market averages to put the volatility in context. As the chart below shows, the Dow Jones Industrial Average breached its 200-day moving average (200 DMA) for the first time in 2015 (as shown by the red line).
Such retreats are typical of somewhat significant corrections, especially during bull markets. Given that the 200 DMA covers so many days, it shows the market’s long-term trend. As the chart below indicates, the S&P 500 index also breached its 200 DMA last week, an event that had only happened once over the past two years.
Interestingly, growth-oriented indexes, including the Nasdaq and the Russell 2000 small-cap index, are holding up much better. While both have breached their 50-day moving averages (50 DMA), a 3.6% move lower is required before either index hits its respective 200 DMA (the 50 DMA is the blue line).
So what should investors make of this? For starters, the charts simply show that growth stocks are holding up better for the time being. Obviously this can change, but for now that’s the market’s message.
To clear the air we need a resolution in Greece, for starters. Uncertainty is not the market’s friend. But even though this is an issue, I think the bigger challenge is the extreme volatility, and lack of confidence, in the Chinese stock market. This one came up quickly – even quicker than the country’s stock market, which had been up as much as 60% in 2015. As a point of reference, the Shanghai Composite Index is still up 15% year-to-date.
The seemingly desperate attempts in China to stem the selloff don’t do anything, in my opinion, to restore confidence. When companies stop trading in their stocks to prevent them from going down, there isn’t much reason to believe the free market is doing its thing. And with over 40% of Chinese companies halting trading in their own shares, it’s clear that market intervention is holding this thing up.
There is a lot that could be said about what’s going on in China’s stock market. But I’m far from an expert on this subject. And I don’t want to become one – I’ve studied and invested enough in Chinese stocks over the years to know that I don’t trust their books, or that market, one bit.
From my vantage point the seemingly obvious takeaway is that China’s stock market represents a lot of manipulation, both to get equities to where they are and to try and keep them from falling further. I don’t foresee a quick and transparent solution that would restore transparency and true market forces, so I would just stay away altogether.
That doesn’t mean the action in China isn’t opening up some interesting opportunities in U.S. growth stocks though. There are still extremely compelling growth trends within the region, and investors can tap into these opportunities with U.S.-listed and U.S.-traded stocks. And it appears that many of these stocks have been overly hammered in the month of July.
In fact, one of my favorite companies with significant China exposure is down almost 15% in July. This is despite the fact that sales in China were up 18% in 2014. And even though a more significant market rout in China is unlikely to hurt economic growth (equity ownership in China only accounts for around 20% of the country’s overall household wealth), investors are not taking any chances.
I’ll be letting you know how to get my research report on this company later this week as part of my Trending Profits newsletter, so if you’re not already on the Trending Profits mailing list, I invite you to click here to gain access to the free newsletter.
So what should growth investors do now?
By and large I advise staying the course. As always, dump your worst performers that are breaking both their 50 DMA and 200 DMA and don’t seem able to catch a bounce. This is especially true if the fundamentals are at all questionable.
You can also selectively buy, but common sense suggests to only buy names that you’re comfortable holding through more market volatility. It’s rational to expect that this summer’s wild swings are not over. I still like growth-oriented names, especially given their relative resilience in this market. So for the time being that’s where I’ll continue to focus my attention.
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