On the Edge of a Bear or Bull Market?

Robert Hsu, July 14, 2008

While the recent market action is nothing new, it doesn't make the volatility and downward spirals any easier for investors to take. Both domestic and foreign markets have been hit, but the American markets have suffered the most.

A combination of sub-prime problems, record oil prices and a slowing economy has weighed down the U.S. markets. The situation is so dire that last month marked the worst June since the Great Depression for the Dow, as it fell 10.2%. And the S&P 500 declined 8.7% in June, the worst monthly performance since the 11% plunge in 2002.

And here are the year-to-date losses of each of the major U.S. benchmarks: The Dow Industrials have plunged 14.4%; the NASDAQ has dropped 13.5%; and the S&P 500 has lost 12.9%

And the Dow has extended its retreat from a record high in October by almost 20%, a decline that fits the textbook definition of a bear market.

Now, even though it's the U.S. markets that are in the headlines for being hit the hardest, Asian markets have been whipped back and forth, too. In fact, Asian stocks have just finished the worst six months in 16 years. The MSCI Asia-Pacific Index dropped to 136.77, losing 8.3% in June and 13.3% in the first-half of the year. It was the worst performance since a 23% drop in the same period of 1992, when Japan's asset bubble was deflating.

With all of this doom and gloom in the domestic and global markets, and fears of a bear market, it is understandable that many investors are discouraged. But I think that we actually have reasons to be cautiously optimistic about the direction of the markets in the coming months.

For the U.S. markets, I think that the coming weeks will have better days. This is mostly because earnings season is upon us, and since the past few months have been rough for the economy and markets, the expectations are low. And a lowered bar is easier to clear, so I think that many earnings reports will beat forecasts, which will help boost the currently oversold market.

And it's not just the U.S. markets that will improve in the coming months -- I look for Asian markets to move up as well. The Chinese market is down about 45% since its peak last October, and it is due for a correction. Combine this with the facts that inflation in Beijing is coming under control and the government there is likely going to let up on its monetary policy, and you can see that the Chinese markets may be inline for an "Olympics rally."

Looking forward, I think there are a few key trends that we should focus on to make money in the coming months. I think that we should continue to invest in the commodities trend, and I also have a few plays to profit if the markets start to move back up. I have several holdings in both my Asia Edge and China Strategy services that are profiting from these trends. To learn about the companies that I recommend to make money from these trends, as well as my buy advice, click here to subscribe to Asia Edge and here for China Strategy