Sell-Off May Create Buying Opportunity

02/28/2007 12:00 am EST


Tobin Smith

Founder and Chief Research Analyst, Transformity Research LLC

Tickers STP WFR

ChangeWave Investing's Tobin Smith says the huge plunge in worldwide markets could prompt investors to "throw the baby out with the bathwater" and ultimately create big bargains for patient investors.

When I wrote [recently] that we would get a 5%-10% correction in the current bull market, I didn't expect Tuesday to be the day. Despite all the panic you'll see on the news and financial channels, we didn't reach 5% down--not to mention the 22% drop from Black Monday in 1987--but we posted some scary numbers, nonetheless.

The benchmark blue-chip [Dow Jones Industrial Average] was down as much as 545 points (about 4.3%) at one point during Tuesday's session before ultimately closing down 416 points or 3.3%.

Every Dow component finished in the red, as did all but two stocks in the Standard & Poor's 500, and the innocent were punished right along with the guilty. Unfortunately, you can expect this any time we have an ugly day like this in the markets.

Chinese stocks were off as much as they could be--they reached "limit down" levels (i.e., the maximum amount they could fall in one session) -- and those stocks could easily have another tough day Wednesday.

The 9% drop in the Shanghai Composite took some of the froth out of a market that was up 15% for 2007, but it certainly doesn't mean that China's growth is turning south--it's just decelerating a bit.

No one makes money panicking, but we have to recognize the bubble in the Chinese market and prepare for further difficulties by protecting our positions. To be on the safe side, I'm recommending placing sell stops on two of our stocks that have the most exposure to the problems in China--Suntech Power Holdings (STP) at $33 and MEMC Electronic Materials (WFR) at $50. (STP traded at $35.58 and WFR at $51.65 in Wednesday morning New York trading-Editor.)

As I noted before, this correction will likely be a multi-day event, and because it came so hard and so out of the blue, I believe this is the best strategy for the time being. I still intend to own these stocks but I want to avoid the volatility if it gets ugly. If WFR and STP blow through our sell stops and we're taken out, it's a strong possibility we'll take a shot at owning them again later.

We will play this move with the expectation of a few days of ugliness, but then we should look for great buy opportunities with any "throw the baby out with the bathwater" sales.

Nothing that happened Tuesday changes my outlook on the ChangeWaves we plan to ride to profits this year. If anything, this sell-off is giving us a fantastic opportunity to build or add to our favorite positions at better prices than we could have possibly imagined [the day before].

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