Bears Have an Emerging Markets Picnic Thanks to Falling Oil Prices

12/16/2014 5:30 pm EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

With the bears on the loose, it's easy to panic and decide to sell everything that looks like it's trending downward, but MoneyShow's Jim Jubak advises against that and points out why following short-term trends is dangerous.

The oil plunge has led to an emerging markets picnic...for bears, anyway.

Take last week's fears that the drop in oil prices was a sign of a slowdown in global growth and add a plunge in the ruble that led to a panicked single-day increase in Russian interest rates to 17% from 10.5% and you've got a market where the bears feel free to roam.

Brazilian stocks down to a five-year low? Time to move on to Mexican stocks and the Mexican peso. Mexican stocks are down only 16% in the past six months while Brazil's Bovespa stock index is down 30% from June.

Take any emerging market with any exposure to oil and selling is the order of the day. Nigerian stocks have moved to a two-year low, for example. It really doesn't matter how the oil exports and imports of refined products nets out, if it smells of oil in the least degree, place a bearish bet. (Mexico, for example, is a an exporter of crude but an importer of refined products.)

But the contagion has become so virulent that traders today are talking about a replay of the Asian currency crisis of 1997-1998. The index that tracks 20 developing country currencies is, today, down to the lowest level since 2008. It makes sense that countries with budget problems caused by the drop in oil prices would be seeing huge drops in their financial markets. Venezuelan bonds, for example, are trading at 40 cents to the dollar and the Russian ruble is above 80 to the US dollar for the first time on record. And that's despite the central bank's 17% interest rate.

But we're definitely in a sell everything market at the moment. Thai stocks, for example, fell the most in 11 months yesterday.

All this fear has meant a rush to the safe haven Japanese yen. The yen, which traded at a low of 121.46 to the dollar on December 5, has strengthened to 117.29 today. Just as a weaker yen has meant higher prices for stocks in Tokyo, the stronger yen has sent Japanese stocks lower. The Nikkei 225 index is down 2.01% today.

Oddly enough, perhaps, the rush to new bearish bets has resulted in a rally in beaten up US energy shares. The Energy Select Sector SPDR ETF (XLE), which tracks the energy sector in the Standard & Poor's 500, was up 0.89% as of 2:00 PM today New York time. The ETF is heavily weighted in big integrated international oil companies such as Exxon Mobil (XOM) and Chevron (CVX) that are doing (comparatively) well today. Shares of Exxon Mobil were down 0.56% at the close and shares of Chevron were up 0.83%.

With the bears on the loose and sectors and country markets rising or falling on the bears' estimates of where they can pick up quick gains from tomorrow's sell off, it's easy to panic and decide to sell everything that looks like it's trending downward. I'd advise against that. The bouncing bears will move on from one sector to another—see the rise in oil stocks today—driven by liquidity and their estimation of relative opportunity. This short-term volatility is extremely hard to predict. The Mexican peso, for example, seems to be dropping because it is more liquid and easier to trade than the Brazilian real and therefore serves as a good stand-in for emerging market currencies as a whole. But following these short-term trends-if you are an investor rather than an experienced trader-is dangerous: You're likely to find yourself buying tomorrow what you sold today and losing on both ends of the trade.

That doesn't mean you shouldn't be selling anything-just that you should try to look beyond the moves of a day or two to the longer trends that are worth selling or buying. Before this most recent spike in volatility and fear, for example, we were clearly in a bear market for commodities. I don't think that has changed overnight. So selling shares of companies and countries with big exposure to that trend—and facing accelerating danger from that trend—makes sense if the recent drop hasn't already priced much of the danger—in your estimation—out of those shares or markets.

I'd be especially leery about drawing any longer-term conclusions on the eve of the Wednesday meeting of the Federal Reserve's Open Market Committee. The post-meeting statement from that group—with the possibility of a market-moving change in language about when the Fed might start to raise rates—is likely to change the background assumptions in the market. This certainly isn't a prediction, but it is a possibility: Today's extreme worries about growth might look very different tomorrow depending on a few words from the Fed. Investing on the basis of a few words and on an attempt to read how a deeply oversold market (in the short-term) will react to those words strikes me as very close to betting on random noise.

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