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How to Turn Turkey’s Pain into Your Gain

By Costas Bocelli August 16, 2018 Facebook Logo Twitter Logo Email Logo LinkedIn Logo

Oh, so close…

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Just as all the major U.S. stock market averages were poised to make new all-time highs...

.. a currency and financial crisis erupts in Turkey, putting the kibosh on that for the moment.

Take the S&P 500, the primary U.S. stock market benchmark index.  It came within 0.3% of poking above the previous record closing high in late-January.

(Click any image to enlarge)

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And the same goes for the Russell 2000, the U.S.-centric small-cap index.

The Russell 2000 has actually been one of the strongest among the major stock indices throughout 2018.  The index has collected a series of new record highs following the stock market correction earlier this year.

russell 2000

But with the latest flare-up engulfing Turkey spilling over into other emerging economies (such as Brazil, Argentina, India and Indonesia), investors are worried things may morph into a full blown global crisis.

Many even compare the current situation to the Asian currency crisis that led to a Russian credit default in the summer of 1998.

That said, It’s important to keep things in perspective.  Comparisons between 2018 and 1998 could be premature.

You see, as an options market maker on the Philly exchange, I actually had a ringside seat to the 1998 global financial crisis.

And let me tell you this…

There was an enormous amount of fear back then, even on the trading floors.

As a market maker, my primary job was to provide liquidity -- that is, to make a two-sided market for customers.

I can recall that when the poop really hit the fan, more than a few traders turned tail and left the trading floor -- which infuriated many of the senior traders.

Now, I’m not saying that the current stress in Turkey and other emerging market economies can’t turn into the next major financial crisis, because anything is possible.

But what I am saying is that the circumstances that rocked the global financial markets back then were far more severe than what’s weighing on the markets today.

For one, there was a real systemic threat that followed the Russian default.  And if not for a government bailout of the largest hedge fund in the world, the entire financial system would have likely imploded.

And as scary as things were back then, recall that the U.S. stock market actually recovered the entire selloff before marching to new highs by the end of 1998.

Today's "crisis", though similar, is far less severe.

Although the global banking system has direct exposure to Turkey, the amount of risk is relatively small.  With so much central bank liquidity pumping through the system, the chances of a systemic failure are greatly reduced.

To be sure, we are seeing weakness in many segments of the International Equities asset class.

Although International Equities still maintains the second ranking in our longer-term broad asset class relative strength rankings, the reality is that all the groups show that supply is in control.

In fact, for quite some time subscribers to Sector Prophets, our data analytics product, have been alerted to Relative Strength weakness and deteriorating breadth among the International segments.

The graphic below is a screenshot taken from Sector Prophets showing that nearly all the international groups are demonstrating poor relative strength and that supply is in control.

SP 1 SP 2

One of the biggest benefits of Sector Prophets is: it alerts investors to changes in the status of 41 narrow industry groups and 4 international segments.

And while many of the international segments are flashing yellow and red signals, there are numerous green signals emanating from U.S. Equities, which maintain the number-one spot in our long-term broad sector Relative Strength rankings.

In last week’s article we gave three reasons why U.S. Equities offer investors plenty of upside.

Strong corporate profit growth, increase buyback commitments, and positive techncials are factors favoring U.S. Equities as we move into the fall.

For investors that have missed out on the recent run-up or find themselves underweight U.S. Equities, the near-term weakness from concerns over Turkey’s financial crisis offers an opportunity to buy high quality, U.S.-centric stocks at a discount.

Take Home Depot (HD) for example.

On Tuesday, the company reported second quarter earnings results that beat top and bottom line analyst estimates.

The company also raised full year guidance as the visibility over the coming quarters looks particularly strong.  Home Depot generates 92% of its sales within the United States and is benefiting from a strong economy, robust labor market and a strong U.S. Dollar.

Its technicals are also strong.

hd

The stock is in an uptrend and is demonstrating positive relative strength versus the stock market and against its sector peers.

Yet the recent pullback in HD now offers investors an opportunity to buy a high quality stock at a lower price.

Oh, and if you'd like to learn more about Sector Prophets, give us a call at 855-822-0269.)

Until next week!

Costas

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