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Market Commentary
Stock Market Decline To Continue
By Emanuel Balarie, Senior Market Strategist
The recent sell off in the precious metals markets and the commodity markets should not be a concern to the average investor who understands the driving forces behind this bull market. Simply put, nothing has changed in the last several weeks. If anything, we saw a spike in the CPI numbers last week, China continued its talk about quadrupling its Gold reserves, and there still has not been a major oil find in 36 years. The story remains the same.
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So why have we seen this vicious sell off in the commodity markets? As is true of most markets and price movements, there are various factors that push prices higher. Of course, fundamental factors continue to be the main driving force behind this bull market in commodities. In the last several months, however, we have seen an added degree of speculation enter the commodity markets. As a. result of technical fund buying and speculative interests that entered the market, we have seen the market move at a much faster and speculative pace. These same speculators that were quick to enter these markets were just as quick to exit and take their short term profits.
The sell off that we have experienced in the last several weeks is the end result of profit taking and speculative interests that have exited the markets. In any bull market, there will be vicious sell offs along the way that shake loose investors that do not really buy into the legitimacy of the bull market. This is a good thing. It is healthy for the overall direction of the market. Consequently, these sell-offs should not hold any significance to the long term investor. If anything, it is anø&è opportunity to purchase Gold or other commodities at a lower price.
Another factor that has contributed to the recent sell off has been the decline in the equity markets. As I mentioned earlier, I made a statement that I believed that we should expect a stock market crash. Since May 11th, we have seen the following scenario play out:
Most investors that are unfamiliar or do not buy into the legitimacy of this bull market, have sold their commodity stocks along with the tech stocks and other market participants. As this decline in the stock market continues, I wouldn't be surprised to see a continual decline in these commodity markets. I do believe, however, that the commodity sector will rebound quickly as it continues to be buoyed by demand.
THE STOCK MARKET
So what about the stock market? Is this just a short term correction in a strong equities bull market? Or is this the beginning of a much greater decline? Of course, I believe that this is not a strong equities market; rather, it is a market that has been pushed higher by artificial consumer spending (think credit card debt, low interest rates, and the use of their homes as ATM machines). As a result, I do believe that we will continue this sell off in the markets. The degree and velocity at which the markets will decline depends on several factors. Interest rates, inflation, and housing seem to be the key factors that will contribute to this stock market decline. As we continue to see higher CPI numbers, higher interest rates, and an acceleration in the housing slowdown, we will see investors liquidate and exit their stock positions. It is important to note that the stock market decline of 2001 is still fresh in the minds of many investors. We will likely see a quicker exit towards the sidelines than we did 5 years ago.
Already, we have seen a flight to safety since this downturn in the market. Generally speaking, when investors fear the markets will decline, they will sell their positions and move to cash or treasuries. Notice the move up in the 30 year Bond in the last several weeks.
This is showing you that some investors are selling their equities and moving to cash. The problem with this action, however, is that an even bigger problem is the declining US dollar. I do expect that as the stock market continues its downward decline, and the dollar and inflation become a bigger issue, you will see a further round of buying into Gold and hard assets.
Gold:
I still believe that we will see $800+ Gold before the year is over. Potentially, I still think that we can see $1000 Gold within the year. As I mentioned in my last commentary ($1000 Gold: It May Be Here Sooner Than You Think), there are a number of factors that could converge at once and send prices higher. Within the last several weeks, we have seen one of those factors (Stock Market Decline) take place. We are also beginning to see a slowdown in the housing market. Locally, we have experienced housing inventory double in the last 2 weeks. In Las Vegas, there are reports of building projects being shut down.
In the short term, I can see a consolidation phase for Gold. I do not see it breaking below $600. Most likely we will see Gold bouncø&è ing from the 635 level to 675.
MANAGED FUTURES
If my scenario does play out, and the stock market does crash, it is that much more important to have a diversified portfolio. Managed futures gives you the ability to make money in up and down markets; and most importantly, is not correlated to the stock market. The below chart shows the worst declines in the stock market and the return of managed futures. As a result, in the stock market's worst decline managed futures were positive.
Source: Numbers Provided By Barclay
Even if you do not agree with my analysis, managed futures offers diversification for any portfolio. The below chart shows how when you add managed futures to your typical stock and bond portoflio, it aids in lowering overall risk and increasing returns. In fact, Dr. John Lintner of Harvard University, stated in a research paper he wrote that "the combined portfolios of stocks (or stocks and bonds) after including judicious investments in leveraged managed futures accounts show substantially less risk at every possible level of expected return than portfolios of stocks (or stocks and bonds) alone."
Source: Chart provided by the CBOT
If you are interested in learning more about Managed Futures and specifically about managers that I recommend please request information here Note: The minimum investment size and strategies vary on a manager by manager basis. Please contact me to discuss the allocations that could be appropriate for your portfolio.
Futures and options trading involve substantial risk.
