In the previous weeks I have been in holidays at grandvalira, spain (http://www.grandvalira.com), playing ski at Paz de la Casa. While I was in the middle of white mountains, markets dived in dark valleys. These have been the worst first weeks of year since i had born in 1977. At the end of this 4th week, markets decreased about 5%, accumulating a decrease of 10% year to date. Even more dangerous is the velocity that main world indices are approaching the 20% fall from previous high level, that signals the beggining of a bear market. All the main world indices had broken most of the more important technical supports and I believe that in the next weeks we will see STOXX 600 and S&P 500 enter in bear market territory.
During this perios large caps are outperforming small caps, that is why STOXX50 and EURO STOXX50 are technically healthier, but in the emergence of the bear market, this indexes shall be affected too.
So, is it time to panic? No! In opposition to others bear markets, this time the starting point is not the end of an huge bull, with stocks priced 40x earnings. At this time, stocks are much cheaper than they were for instance in 2000 bubble. So we shall not assist to a fall of 40% of the markets. At this time, a correction was needed because economy is being affect by the financial crisis, probably US economy will touch recession levels. But we will not assist to a large depression, and the recession effect is mostly discounted by the markets at these levels. I believe that today the financial markets are fairly priced. During the next next 2 weeks we wiil probably see one of the well known inefficiencies of the markets: overreaction.
When we look to the TICK INDEX, a measure of upticks trades subtracted by downtick trades we can have a perception of the panic that is already present in the market. This situation will create good buy opportunities since overstressed investors are not so rational as the efficient market hipotesys assumes. So, when buying stocks during the next 2 weeks people should not be waiting to profit from these trades in the short term, but in a year from now these investment should provide one interesting return risk adjusted reward.
In the short term investors can suffer even more if the chinese financial market bubble burst in consequence of the current panic levels. In the other hand, falling oil prices should be reflected by lower inflation concerns and gold and silver shall fall. Copper shall also fall due to lower economic activity. In order to find nice investment opportunities look in the major loosers for stocks not dependent of US economy, not leveraged and not correlated with oil, metalls and other commoditties prices. Why not some european financials?
These times can also be a great opportunity to increase or take new positions in some emerging markets, with brasil and india being some of the most promisig BRICs.
These are my ideias at the present time. I share it with you in order to test them. I wish you have different view and debate this themes with me. My opinion is not any recomendation to buy or sell stocks and i will not accept any responsability one losses people can get, by using information on this blog!