Action Plan for the Market's Pullback

It was a nice run while it lasted. As I mentioned last week, the latest FOMC minutes sparked a celebration on Wall Street that ended up lasting through Monday. However, the party came to an abrupt halt yesterday after investors reacted to the latest analyst commentary, economic data and geopolitical news. A lot has happened in the past few days, so let’s take a moment to review it all.

What Happened Yesterday

The technology sector was hit especially hard after some analysts suggested that the rising U.S. dollar would weigh on demand for electronic products, and by extension, semiconductors. I don’t see any merit to these claims, as far as the top tech stocks are concerned. Apple Inc. (AAPL), Avago Technologies Ltd. (AVGO), Skyworks Solutions Inc. (SWKS) and NXP Semiconductors NV (NXPI), which I have featured in the blog recently, all have strong forecasted sales and earnings growth.

Investors also reacted to the durable goods report, which revealed that orders for long-lasting goods fell 1.4%. This is the third decline in four months. However, what some are ignoring is that durable goods orders jumped a revised 2.0% in January. So, it shouldn’t come as a huge surprise that they pulled back.

What’s Happening Today

Late last night, Saudi Arabia and its regional allies launched airstrikes against targets around Yemen’s capital city, Sanaa. Last fall, Houthi militants took control of Sanaa and have taken control of the government. With Yemen locked in a civil war, this has allowed terrorist organizations to gain more traction in the area.

Yemen’s president Abd-Rabbu Mansour Hadi, who had been deposed but is still battling the rebels, called on Saudi Arabia to help restore the former government to power. Saudi Arabia, which shares a border with Yemen, is answering Hadi’s call. While nine of Saudi Arabia’s neighbor states support the military move, Iran condemned the intervention.

The announcement took the financial markets by surprise, so oil prices are rising while stocks are falling on the news. Saudi Arabia is the world’s largest oil exporter, so some believe that any prolonged military action in Yemen could curtail its oil production. However, it’s too soon to tell how this will impact global oil supplies, and with U.S. crude inventories at an 80-year high, I don’t expect oil prices to rebound significantly any time soon.

What We Should Be Doing

As far as the stock market is concerned, I think too many investors are using these latest developments as an excuse to take profits. In addition, High Frequency Trading (HFT) systems are adding to the volatility. HFT systems are oftentimes programmed to “flip a switch” following a rally, so it’s not surprising to see some profit taking after last week’s rally.

Over the past several weeks we’ve seen an increase in volatility in the stock market, but this is not the time to cash out. Instead, we all need to be especially strict with our stock picking, selecting only companies with solid sales and earnings growth, and limited exposure to weakening foreign currencies. And when possible, a healthy dividend will also help stabilize a stock as the market sloshes around.

The bottom line is that you should be running each and every one of your holdings through Portfolio Grader to check that your portfolio is in good shape. And if you want to take your investing strategy to the next level, I’ve been doing quite a bit of "spring cleaning" across my investment newsletters. For the past several weeks (in some cases, months), I’ve been fine-tuning each and every Buy List, Portfolio and Model Portfolio I manage to better cope with whatever the market may throw at us.

Either way, I’ll be in touch in this daily blog with additional market updates, my stock analysis and more.


Louis Navellier

Louis Navellier

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