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Buy low, sell high...but stay away from commodities

An investor looks at an electronic board showing stock information in Hangzhou, China.
China Daily | Reuters
An investor looks at an electronic board showing stock information in Hangzhou, China.

The global stock rout may have claimed some victims this week, with heavy selling sending the S&P 500 into correction territory, but equity markets can still offer returns for investors.

The definition of "correction territory" is when you see a downward move from a recent high of 10 percent or more. The definition of "bear market territory" is when you have a 20 percent move down over the course of at least 2 months.

Down 17 percent since its recent high in April, the broad-based European Stoxx 600 index is now officially in "correction territory". With many European stock market indexes down 5 percent Monday, when does a correction become a buying opportunity?

In recent weeks, the majority of my guests on "European Closing Bell" still think European stocks will continue higher, but many of them are cautious on commodities. The Chinese data continues to be much weaker than expected, and China is not only the world's second biggest economy, but it is also the world's largest metals consumer.

Christopher Mahon, the director of asset allocation research at Barings, told me last week: "it is unlikely that Chinese GDP (gross domestic product) figures are anywhere near their 7 percent target, and they are probably not even close to the 5 percent area that now is consensus."

Mahon thinks investors should continue to add to their European stocks portfolio, but stresses that they should avoid stocks with exposure to China, and instead pick stocks that are as domestically exposed as possible.

Mahon also thinks investors should be looking to buy companies that pay out big dividends, as a negative interest rate environment means that dividend-paying stocks become that much more attractive.

When I asked him whether the pressure on commodities would continue, Mahon said he thinks very few people are acknowledging the severity of the global slowdown, pointing out the 20 percent drop seen in rail freight, the 15 percent drop in Chinese residential construction, and the 3 percent drop in global car sales year-on-year.

"There is nothing on the other side of the equation that is accelerating to offset these slowdowns," Mahon added.

Gartman goes bullish on oil

The wild card this year has been the price of oil. Exactly a year ago, the Nymex oil contract was just shy of $100 a barrel. Fast forward to the end of last week, and WTI light sweet crude fell below $40 a barrel for the first time since 2009.

One of the main talking points on "European Closing Bell" is when the price of oil will bottom out. While most analysts still support the view that oil could go lower, based on the main producers continuing to churn out more supply than demand, Dennis Gartman, the editor and publisher of The Gartman Letter, has just changed his view.

Gartman has gone from bearish to bullish on oil in his latest publication, stating that "the term structure shifts mandate that we do so."

"As prices have fallen, the contangos (where the future spot price is below the current price) in both Brent and WTI have narrowed….which we now see as a sign of impending strength (for the price of crude oil)," Gartman said in his letter on Friday.

He also highlighted that his team will be watching (oil) rig counts in the U.S. "for any signs, finally, of reduced production of crude" for a number of oil fields. They'll also be paying more attention to the natural gas market, with any signs of strength in natural gas adding to their "nascent enthusiasm for crude oil.'

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Louisa Bojesen is the presenter of CNBC's 'European Closing Bell', Monday to Friday at 4-5 p.m. London time. Follow Louisa on Twitter @louisabojesen