The Sell-off Continues
Well it's about time. The markets are selling off as investors book short-term gains that in many cases far exceed the long-term annual average gains of the market. If the Standard and Poor 500 index has averaged 6% since inception in 1957, and investors have beaten that by a fair margin in just months, even weeks, doesn't it make sense to sell some shares to lock in gains? Of course it does.
Intra-day today the Standard and Poor 500 index is down 1.8%, while the Dow Jones Industrial Index is falling 2%. But the Russell 2000 small-cap index is only down 1.3%. This is somewhat surprising because usually small-caps lead to the downside when there is a sell-off. Of course, they tend to lead to the upside when the markets are rallying too. And that's why I'm a small-cap investor, the potential for big profits.
But today's market action runs counter to that trend, and the takeaway message is that investors have not lost their appetite for risk. While the selling may not be over, I find the markets movement to this point to be encouraging for small-cap investing early in 2010. The Russell 2000 could retreat back to 600 (a 4.7% decline) in the coming weeks, but it will find significant support there and frankly I think it's unlikely that such a drop is on the horizon. I'm looking for the index to bounce off 620 (a 1.6% decline) if the selling continues.
Well it's about time. The markets are selling off as investors book short-term gains that in many cases far exceed the long-term annual average gains of the market. If the Standard and Poor 500 index has averaged 6% since inception in 1957, and investors have beaten that by a fair margin in just months, even weeks, doesn't it make sense to sell some shares to lock in gains? Of course it does.
Intra-day today the Standard and Poor 500 index is down 1.8%, while the Dow Jones Industrial Index is falling 2%. But the Russell 2000 small-cap index is only down 1.3%. This is somewhat surprising because usually small-caps lead to the downside when there is a sell-off. Of course, they tend to lead to the upside when the markets are rallying too. And that's why I'm a small-cap investor, the potential for big profits.
But today's market action runs counter to that trend, and the takeaway message is that investors have not lost their appetite for risk. While the selling may not be over, I find the markets movement to this point to be encouraging for small-cap investing early in 2010. The Russell 2000 could retreat back to 600 (a 4.7% decline) in the coming weeks, but it will find significant support there and frankly I think it's unlikely that such a drop is on the horizon. I'm looking for the index to bounce off 620 (a 1.6% decline) if the selling continues.
Down days like this raise the question of when to buy shares. Is today a buying opportunity? The simple answer is yes. That is if the stock you want to own is trading in a price range that is reasonable based on your long-term price target (or short-term target if you're a trader). I'm an investor, so I set long-term price targets.
A subscriber to SmallCapInvestor PRO wrote in this week asking about price targets. Specifically, he wanted to know why I had not increased the price target for a portfolio stock, China Green Agriculture (NYSE: CGA) that had exceeded my target. Since I recommended it in June 2009, the stock had risen 113% as of Friday's close. Strong demand and heavy buying of shares had pushed the price 10% above my price target. This was my response:
"Occasionally, stocks will exceed our target price for some time before we update our target. Conversely, sometimes they fall back below our target price and remain there for some time. Since our target is based on valuation methods we feel represent fair value for the stock (and not just market sentiment), it is only updated once we feel it is justified. Otherwise, subscribers are faced with changing target prices that simply track a stock's past performance, and may not represent where we think the price is likely to go in the future. Currently we are evaluating China Green Agriculture and considering updating our target price, but have not yet done so."
Today China Green Agriculture is down 8.5%, bringing the stock's total decline since Friday's close to 13%. Shares are now trading back below my target price, albeit by a very slim margin. I'm not trying to say that I knew this stock would sell-off, of course I didn't. My point is to impress upon you the importance of having a game plan for investing, and price targets are a critical part of that game plan. Without one, you don't know when a buying opportunity arises.
Your timing won't always be perfect, but you need a framework for investing - otherwise you will always be chasing the market. Today is indeed a buying opportunity for many stocks, and I expect subscribers to SmallCapInvestor PRO are purchasing shares of stocks that have an attractive profit margin before they reach my target prices.
By the way, I am still evaluating China Green Agriculture and considering increasing my price target on the stock. Subscribers will be the first to know if, when, and by how much, I increase it. If you're not already a SmallCapInvestor PRO subscriber, you can join today by clicking here now, and you'll be alerted to any upgrade to my share price target on this stock.
***While the overall Russell 2000 index is looking relatively strong, individual small caps that you may hold in your portfolio are likely to be taking a hit today. Certainly this is the case for some stocks in the SmallCapInvestor PRO portfolio. But others that I've brought to the attention of subscribers are doing quite nicely, including China Natural Gas (Nasdaq: CHNG) which is up 3% intra-day.
Another China small-cap stock that I just recently recommended is up 1.4% intraday. This is a $4 energy micro-cap that's likely to grow earnings per share in 2009 by 147% over 2008 when it reports year end results. The company's exceptional revenue growth is already up 75% over 2008 (with fourth quarter results yet to come) and is directly benefiting from the Chinese government's push to install its super-efficient electrical transformers. Demand for these transformers is so strong that the company will increase production capacity 200% this year. I expect a surge in revenue and the company's stock price. You can read my full research report on this company when you sign up for SmallCapInvestor PRO, just click here to get started.
***Bloomberg reported today that China's GDP rose 10.7% in the fourth quarter of 2009 over the fourth quarter of 2008. The country also revised its third quarter 2009 growth to 9.1%, from 8.9%, which means GDP growth for the full year now sits at 8.7%. Estimates are that another 9% is coming in 2010. That's not too shabby, and the strength in China is a major contributor to the World Bank's higher global growth forecast for 2010, now up to 2.7% from 2%.
In 2009, China overtook the U.S. as the world's biggest auto market, and Germany as the world's biggest exporter. It will be a few years before China's $4.9 trillion economy is larger than America's, but that day is coming.
Despite the challenges China is facing, I still see tremendous long-term potential investing in China. Sure, there will be ups and downs, but over time, investors will make a lot of money on Chinese stocks.
For more on my Chinese investment strategies, you can watch the replay of last night's video investment conference China Inc.: Understanding China for Outstanding Profits. You can watch the video by clicking here .
