How To Profit From The “Stealth” Market Correction [Dow Jones Industrial Average(INDEXDJX:.DJI)]

Market Rotation Is All About Value

Despite what you may hear from the talking heads on CNBC, this isn’t simply a rotation out of small- and into large-cap stocks. (NASDAQ:AMZN) for example, is one of the largest-cap stocks in the S&P 500 … but its shares are down 22 percent this year. And it’s not about investors moving away from sexy Internet and biotech shares in favor of good old cyclical stocks either. Case in point: Facebook (NASDAQ:FB) is up 16 percent year to date and didn’t lose much ground during March and April.

In a slow-growth economic environment, and with the world’s major central banks still manipulating financial markets, investors are seeking out undervalued assets with a margin of safety but that still offer solid upside potential.

This rotational correction has been all about a search for value, plain and simple.

Take the energy sector, for example. Energy stocks lagged the market badly last year, but the sector is among the leaders so far in 2014, up 6.7 percent and far ahead of the S&P 500 Index.

And take another look at emerging markets, which are also rotating back toward the top of the performance derby. While over-bought Internet and small-cap stocks struggled through a rotational correction, undervalued international stock markets were bouncing back to life.

Click for larger version

The chart above plots the advance-decline ratio of 73 global stock markets. When the line is moving up from lower-left to upper-right, as it is right now, it means the majority of international stock markets are moving higher in tandem.

Since March 1, the Vanguard Emerging Markets ETF (NYSEARCA:VWO) is up 9.4 percent, while the S&P 500 Index has gained only 2.8 percent.

Select emerging markets remain very attractively valued compared to major developed markets. For example, the S&P 500 Index, at a fresh record high, is priced at more than17 times earnings. Meanwhile, the MSCI Emerging Market Index is available to investors at just 10.7 times profits, a significant 40 percent discount.

It’s easy to see why select emerging markets are benefiting from investors’ search for undervalued assets with a margin of safety.

Mike BurnickWritten By Mike Burnick From Money And Markets

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