How to stop worrying about market corrections and profit from them
Patient investors can do well in a correction, says a Canadian advisory that downplays worries on China and has a buy on a Chinese stock.
Once upon a time, kids were brought up on cod liver oil.
It tasted awful, but it was good for you. So ran the argument.
Now the value of cod liver oil is under attack from some scientific quarters, but the principle remains the same.
Unpleasant medicine can make you better. For investors, that unpleasant medicine is a market correction.
But like cod liver oil for our grandparents, corrections are healthy for the market, says one Canadian advisory.
And the sharp correction that struck this month does not look like the first signs of a bearish trend, adds KeyStone's SmallCap Stock Report.
Published in Vancouver by a group of independent researchers, this advisory does not worry unduly about corrections. Its unfailing motto is that this is a “market of stocks” in which good value is always available.
With stocks down yesterday and in the early going today, it’s a good time for investors to reaffirm that the sky does not fall when stocks do.
The advisory notes, too, that for all the crises we have seen, the greatest worry for the markets may be the pace of the Chinese economy.
These researchers know that market well. They discuss its prospects and update one of their favourite Chinese stocks.
Keeping up the pace
March 9, 2009 is now a famous date in stock market history. Since that low point, stock markets have been on a long bull rally.
Overall, says this advisory, the gains have added an estimated $28 trillion to share values around the world.
“Given this strong equity environment in the face of continued global uncertainty and high unemployment,” says this advisory, investors should not be surprised to go through a correction.
Of course, the earthquake and tsunami in Japan shook the markets in the middle of March. But even before that, the S&P/TSX Composite Index lost over 4 per cent on disappointing trade data from China.
China continues to be the linchpin of global prosperity in the opinion of almost all economists. They just can’t agree on whether or not it can keep up the pace.
The funny thing
When China announced a trade deficit for February, it caught the experts off guard. Exports fell 2.4 per cent (partly due to factories idled a week for the Lunar New Year) and imports of higher-priced oil and other commodities rose 19.4 per cent.
Instead of the expected surplus of $4.9 billion, there was a deficit of $7.3 billion. Economists threw their hands up in the face of a slowing Chinese economy.
If China is the engine that is pulling the global economy, they fretted, this is bad news.
This advisory is taking it all with a grain of salt. These researchers were studying China closely long before most observers got on the bandwagon (or even realized there was a bandwagon).
“The funny thing is the same economists have been calling for a slowdown in the Chinese economy as the world’s second largest economy was in their opinion overheated.”
We will monitor the situation, says the advisory, “but at times it just appears that the markets need an excuse to sell off.”
And a sell-off can be good for you.
Patience is required
No asset can keep going up in a straight line, the advisory reminds its readers. So while a correction brings short-term pain, it is also a good time to step back, see how far the markets have come in two years, and breathe a little easier.
“If a correction persists, there will likely be opportunities.”
But was this month’s sell-off just a correction in the bull market, or the first sign of a reversal of the trend, leading to darker days ahead? These researchers believe it has all the earmarks of a correction.
Although the S&P 500 Index has almost doubled in just over two years, it is still 36 per cent below the average bull market gain of 131 per cent since 1962.
Above all, remember that this is a “market of stocks,” emphasizes the advisory. “Some will perform well and others will not in both up and down markets. The gains are just exaggerated in a bull market.”
Keep your eye on the long term. “Good companies, bought at reasonable or low valuations will eventually reward us with superior returns in the mid to long term.”
That is precisely the case with one Chinese stock KeyStone's SmallCap Stock Report has followed for some time. Zungui Haixi Corp. (TSX/V-ZUN) has delivered strong share price gains in the past.
Now this maker of athletic footwear and apparel is spending to build up its retail network. It is investing in services, training, subsidies for distributors and pumped-up advertising. This should continue for the next two quarters, says the advisory.
This spending program is due to pay off, perhaps as soon as the fourth quarter of 2011. “Patience is required, but the company continues to offer good fundamentals and build its business with cash, a strategy we have seen be very successful long term in the past.”
The stock, as high as $3.23 in the fall, is now trading at $2.57. It does not pay a dividend. It’s a Focus Buy.
Patience may be the single biggest virtue in market correction, as this advisory suggests. Those that cut and run are simply taking losses, while those who are willing to take their medicine and look for opportunities can wind up with much healthier gains.
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