Crisis Investing: Buying Rate Hike Fears
By Ian Cooper
Having brought your attention to the June 2004 Colombia stock exchange’s (IGBC) 10% sell-off on concerns of higher U.S. interest rates, you have a good idea of the reactionary tale that follows such fears. However, once such fears are realized, the markets have a historical tendency to absorb the fear and refill any reactionary gap.
With regards to Colombia’s 10% sell-off, the gap was soon filled following the U.S. decision to increase the federal funds rate by a quarter percentage point on June 30, 2004. Unfortunately, those that sold at or near the bottom of the sell-off missed the opportunity to profit as the IGBC rose 402.03 points, or 6.5%, two days later, and to pre-fear levels a year later.
Plus, the sell-off gave “crisis investors” the opportunity to search for those stocks badly beaten, and to profit handsomely on the broader market rebound. Bancolombia, for example, was up 10% on the rebound. Cementos Argos was up 18% on the rebound, recovering its 18% losses on the rate hike fears.
Crisis Investing: Brazil’s Bovespa
Notice the three-day, 3%+ drop on the Bovespa chart below. This was the direct result of Alan Greenspan’s warning of a “dramatic contraction” in Chinese stocks, as well as on worries of higher U.S. interest rates, which could force monies to be pulled from emerging markets, such as Brazil.
However, one of the common mistakes investors made was selling at or near a bottom of the downtrend. If you had sold, at or near the bottom of the three-day down-move, you missed Friday’s 2.15%, or 1,087-point rise.
You buy when the streets run red with blood. When crisis hits, be ready. While most people run for cover, fortunes await traders who have both the backbone and financial means to buy fear. Or, as Warren Buffett best said, “Be fearful when others are greedy. Be greedy when others are fearful.”
As I’ve said before, investors in crisis mode have no patience. Fear rules as the blood turns cold. But that, my friends, is when you get greedy. And it looks as if Crisis Trader may begin to get greedy with the Nikkei 225 and Hang Seng sell-offs last week on overheating China and U.S interest rate hike fears. Stay tuned.
Ian L. Cooper
Crisis Analyst, Crisis Trader
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