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July 23, 2014

Eyes for Russian Stocks

Professional investors love turmoil and panics. Such periods drive down the prices of assets related to the turmoil, delivering excellent, long-term opportunities. And so my investing persona (as opposed to my more dominant trading persona) cannot help but be piqued by the mess that has been created in Ukraine and the effects that crisis is having on Russian stocks.

Russian stocks are cheap. I will defer the details of the fundamental metrics to Tiho's excellent post, but keep in mind that after a bear market which has stretched more than three years and seen the Russian stock market drop over 40%, Russian stocks are now sporting a collective P/E under 7. These metrics alone are in line with typical conditions of major market bottoms.

Of course, this crisis could certainly stretch for many more months or even quarters, seeing Russian stocks drag along their lows. If the powers-that-be decide to behave even more foolishly, perhaps the crisis will get worse, pushing Russian stocks even lower. But current valuations offer explosive fuel for a rally should the situation in Ukraine ease or come to a peaceful resolution.

I will make no claim to an ability to predict how the Ukraine crisis will play out. The key to timing an entry will be the Russian stock market's relative performance to news. In other words, if Russian stocks resist declining in the face of continued bad news, an investor could then seek an entry point. I will use my favorite tool, cycle methodology, once we begin seeing these signs of relative strength.

The Russian stock market reacted negatively to the downing of the Malaysian Air flight. Although stocks did not crash, I would prefer to see an initial, negative reaction quickly reversed. Such behavior would deliver an indication that Russian equities are becoming resistant to bad news.

The Russian market is also due for a weekly cycle low near the end of this quarter or toward the middle of the next. Did the Malaysian tragedy kick off a weekly cycle decline or will Russian stocks recover to new cycle highs before heading into a low? If we see new highs, I will look at taking my first stab at RSX at the next cycle low.


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