Retracement,correction or panicky plunge: Initial thoughts on today's falling markets

04/15/2013 1:58 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

As if April 15 wasn’t already painful enough…

Today we’ve got either a standard retracement of the April rally, a sell off in growth-related stocks on a disappointing report on first quarter GDP out of China, or a panicky plunge in oil, industrial materials, silver and gold.

It’s certainly a down market today but the nature of the “down-ness” depends on how your portfolio is positioned.

It’s hard to judge a downturn while it’s in progress—either for severity or duration—but here’s how I understand what we’re seeing today.

Doubts about growth prospects have been rising for months as analysts cut their earnings forecasts for U.S. stocks even as stock priced rose. Last week, earnings reports from Alcoa (AA), Wells Fargo (WFC), and JPMorgan Chase (JPM) that showed year over year declines in revenue. That added to a general sense of worry over economic growth resulting from projections for lower growth in the EuroZone and disappointing retails sales growth in the United States. The clincher for investors worried about growth came overnight when China announced first quarter GDP growth of “just” 7.7%. That was below economist projections of 8% and below the 7.9% growth posted in the fourth quarter of 2012.

If global growth is going to be lower than expected, you’d expect commodity prices to fall. That decline today, however, has been amplified by a previous retreat in commodity prices. So commodities aren’t just retreating today—they’re reacting to today’s move lower as if it is a continuation of a longer bearish pattern. Today benchmark Brent crude is down 2.2% and London Metal Exchange 3-month contracts on copper are down 2.7%.

The biggest damage, though, comes in gold and silver where today has just accelerated a move that turned from correction to plunge last week when Goldman Sachs recommended going short gold. Comex gold is down 8.3% as of 1 p.m. New York time and Comex silver is down 10.5%. One rumor making the rounds of the trading floors is that the market is seeing forced liquidations of long positions in gold and silver as traders with positions purchased on margin are forced to sell.

The big questions, of course, are Where do we go from here? and What do you do?

There is certainly an element of panic in today’s plunge, especially in gold and silver, that makes me want to say we’re seeing the kind of collapse that puts in a bottom.

However, I think that would be wishful thinking. The bull market in precious metals ran for so long that I think it will take more than a few days or weeks to establish a floor for another move upwards. That’s especially the case since it’s hard to see any evidence of rising inflation or other economic fundamentals that would build a case for owning gold here. Gold miners seem especially vulnerable to more downside since they face rising costs along with falling gold prices. If you’re going to hold onto any gold mining stocks here, I’d be very, very selective and pick only those that have superior production stories to tell that might support the share prices. But even in those cases I’d worry about trying to catch a falling knife. I’ll try to run through some gold mining stocks and their prospects tomorrow.

Energy and materials commodities in general look to remain weak until growth worries have bottomed. Again, I don’t think that happens overnight. This certainly isn’t a time to be overweight these sectors, or the shares of producers or suppliers to those producers. Make sure when you go through your portfolio that you’re being honest about your exposure. Yes, Chevron (CVX) is a commodity producer, but then Schlumberger (SLB), National Oilwell Varco (NOV), and Holly Energy (HFC) are all commodity stocks too.

I think the initial market temptation will be to seek safety in consumer stocks. That’s not the risk-free play that it seems because there’s been a steady move toward these shares for the last months of the current rally and the shares are now relatively expensive. We’ve got some key bellwether earnings reports coming out this week from Coca-Cola (KO) and McDonald’s (MCD); earnings and revenue growth from these companies will go a long way to determine whether consumer companies continue to be seen as safe havens that justify their premiums.

I’d also expect that, as usual, emerging market shares, will take a big hit from the rise in general fear. We’re likely to see strong selling pressure on markets from China to Brazil as traders seek safety. That, ironically, will hurt Japanese stocks by strengthening the yen, which continues to be seen as a safe haven in times of increased volatility.

I’ll try to put together a post later today on the value of raising cash now—and what you might want to do with cash if and when you have any.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund owned shares of Schlumberger as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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