What with the slowing of economic growth in Europe, the anxiety created by the continued spread of the Ebola virus, escalating conflicts in both the Middle East and Ukraine, and in particular the end of monetary stimulus in the US, these issues all contributed to trigger the sharp sell-off of just 2 weeks ago and that led to a big increase in market volatility over the last month.
Following nearly 2 years of trading without a 10% correction, the S&P 500 finally broke this run with a decline of 10% at the lows of 1820 only 8 trading days ago. It is amazing that the index has rebounded so sharply and indeed, at the close of play on Friday, was trading only 3% from its all-time high. That’s some rebound!
S&P 500 6 months chart
It was on September 19 that the S&P 500 hit an intraday record high at 2,019.26, and which, in hindsight, marked the beginning of a large selloff. Between that date and October 15, the market declined almost 10% to hit 1,820.66, or halfway to what is technically considered as a bear market. Investors quickly ran for the perceived safety of bonds and, to a lesser degree, gold and silver. In seeking the (wrongly and deluded-ly in our opinion) safety of US & European government bonds, volume surged without precedent as reported by ICAP Plc, the largest global interdealer broker. The company in fact reported an increase of 40% in trading volumes over the previous record, a stunning measure that shows just how frenetic trading was on those volatile days in mid October. In terms of stocks, almost 12 billion were traded in US equity exchanges on October 15 alone, a figure which is the highest number since the European debt crisis in 2011.
While markets have continued to recover, the events seen in the last few weeks are nevertheless scary. What is intriguing to us here at Titan however is that sentiment has rebounded so sharply in such a short space of time. Usually fear remains in the background after such a drubbing but, on this occasion, this has not been the case as the AAII sentiment survey below illustrates and where bullish sentiment has jumped back towards multi-year highs and the sharp drop in the VIX in the last several days also pays testimony to.
The trading range of the markets on the day of October 15 was massive and, from what we hear, this was a nightmare for almost all spread betters and traders, largely due to the use of too much leverage. Most of them just saw their positions automatically closed by the system and, in the process, missed the subsequent rally that could have offset their losses…
The Fed’s James Bullard
With comments from the Fed’s Bullard that there could be a new bout of QE if economic activity continues to slow and the deflationary signs which range from the falling oil price to negative 2 year German bond yields intensify, it seems the “hit” of another shot of monetary stimulus is all that is needed to keep the Ponzi going… Our proprietary indicators alerted us to the low in the markets on October 15 and now, with the index trading back towards the high, we wonder, with the renewed positive sentiment in the markets, whether this is the so called “suckers rally” and the last opportunity to get out? On balance we think that the markets are likely to run a little further, perhaps just beyond the all time high and then it’s time to get of of dodge again!
Our favourite sectors: precious metals and selected oil E&P continue to ignore the value signs that flash in 50 foot neon to us. Industry experts: old time shrewd fund managers like George Soros and Jim Rogers and Marc Faber continue to accumulate these assets as prices drift seemingly ever lower. We take solace in being in such hallowed company, company that has, over the cycle, proved that they can generate real wealth through taking the other side of the beaten down trade.
As an indication of just how detached from reality many of the precious metals stocks are, take a look at the table below.
Silver stocks basket deviation from analyst median price targets
This table depicts the differential between many silver stocks and their median target prices (which have already been cut, aggregately, meaningfully this year) – the higher the bar chart the cheaper the stock is relative to its target.
Take a look here also at the price to book value for the major gold miners too. Although not back to the nadirs of 2013 due to write downs many companies have seen this year and that has depleted the “book” side faster than the price element, it is unarguable that on a long term basis these are materially undervalued.
From a pure sentiment perspective, this is about as bad as it gets. Even we at Titan are questioning everything we have postulated and researched on the Precious Metals sector. Are prices going lower, is the record short futures positioning in the silver paper market based on solid fundamentals, can the technicals get even more oversold? The bull points of increasing physical demand for gold and silver physical, reducing supply going forward, the cheapest stock prices for years on almost all value measures and, a complete absence of insider selling, these are all fading into the background of relentless declines… Calling the bottom in this sector is becoming an ever more crowded graveyard.
I guess in proof reading this piece, the last bull has almost given up and that must be the ultimate buy signal!
You should not take this piece as an advocation to trade in any of the instruments mentioned here and you should always take professional advice in relation to your own personal circumstances.
*All Titan Funds operate within a spread betting account which means that gains or losses are currently free of tax. However, legislation can change in the future. Spread betting is a leveraged product which could result in losses of some or even all of your initial deposit. Ensure that you fully understand the risks.