Question: How do you know ahead of time when a garden-variety correction is about to turn into a bear market rout?
Answer: You don't.
I would love to tell you that there is a tried and true way to make that distinction ahead of time, but there isn't. At best, you can look at past scenarios that were similar and handicap the odds to the best of your ability.
With that said, look at the recent performance of the iShares MSCI Spain ETF (NYSE: EWP). The Spain ETF is down nearly 10% from its January highs and is in negative territory for the year. Given the bad press coming out of Spain these days (a corruption scandal is threatening to tank to government that implemented the reforms that appeased the bond market last year), it is understandable if you fear that Spanish stocks are in the early stages of another bear market tumble.
But if this is the case, then the six-month rally in EWP would be one of the shortest on record. When the Spanish market rallies, it rallies hard.
More importantly, Spanish stocks are cheap at barely 11 times earnings, and sentiment towards them remains horrid. With European Central Bank President Mario Draghi suggesting this week that the euro is priced too high (implying that further monetary easing may be in the cards), my bet is that Spanish stocks are simply taking a short break before taking the next leg up.
Action to take: Buy EWP at market. Use a 10% stop loss.
Disclosures: Sizemore Capital is long EWP.
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