After a turbulent two weeks in which the indices retrenched and precious metals and miners fell to 52-week or secular lows, a mix of metrics, trends and fundamentals shows how to maximize gains in this dicey year. There are good opportunities to grow assets before exiting to a more defensive position.
In a couple of recent columns I've quoted John Williams using the metaphor of a ski jump to depict market behavior since May 2012: "A plunge and then moving forward, maybe up a little bit and then plunging anew." Williams believes the economy is in a double-dip recession while the markets soar and plunge on euphoria, government stimulus and the slingshot effect of talking points and simplified narratives. Everyone should read that interview.
Trends say the run still is vital but there are caution lights about its longevity. A good sign is a lack of euphoria and indications that retail investors understand volatility. The bull-bear spread neared 35 points in late January, narrowed to 26 points then to 14 (42-28) on February 13. On day one of the climatic 2-day crash in the metals sector and the first of two corrective days in stocks, the ratio fell to just over 9 points, 41.8 to 32.5. This is a big shift in three weeks and probably a healthy one. Investors were savvy according to Lipper: as the rise leveled $620 million was withdrawn from equity funds and the week of February 19, $924 million went back in at lower prices. Double this amount, $1.7 billion went to mutual funds holding foreign equities.
Insider selling was 9-1 early in the month on DOW 14,000. Last year selling like this in March presaged a rough four months for the indices. Yardeni research's current report linked above shows the Global Growth Barometer in a two-year descending trend. This does not bode well for foreign markets albeit the top-10 in 2012 were emerging venues.
Smart money in hedge funds and the interlinked algorithms may seize profits and create sudden strong downdrafts but the trend still ascends. The SP continues its secular up-channel of higher highs and higher lows. Indeed, except for the mid-2011 gasp this bull has been running since late March 2009. The Dow Jones and Transportation Composite indices have been surging in tandem from the last week of 2012 through February 21. The S&P 200-day MA still rises though at a flatter angle the climb it began in June 2009. The S&P itself still pulls the 50- and 200-day MA upward. We are at an inflection as the bull pauses in its run away from the sagging economy and actual life of most people. Barring a change in this growing disjunction, it will not end well. For now, add to positions in U.S. stocks. Be more temperate ex-U.S. Though foreign equities are lagging, their trend is down.
Cautions flare from economic weakness. A metric on this is the decline in S&P relative to its 200-day average. In this ratio, Yardeni's charts show a descending channel with lower highs and lows since June 9. As with most stimulants, and this is a terribly over-stimulated culture, Fed interventions have decreasing effect on the market-junky. The high from what Michael Pento calls the Fed's "hopium," inflating markets by devaluation is wearing off. This points to crisis by the end of 2014. Interestingly, examining of the channel of the 12-year bull in precious metals shows that by 2014, barring major fiscal or geopolitical disruption gold should hit 2300 - 2500 /oz. This suggests how one should respond to the recent turbulence.
Energy, Healthcare, Info Tech, Consumer Staples and Discretionary, in that order have continued to lead this bull and all should lead until significant correction leaves Health Care and Consumer Staples pulling the cart. These two sectors have the strongest up tick in recent months. Consumer Discretionary shows by far the greatest strength relative to the S&P over all. The rich are getting richer. Fiscal policy and government regulation is shaping America into a pyramidal culture and the fall out in economics and market performance, hitherto supported on the backs of consumer will start to stagger. Combine this with heavy insider selling and there are clear signs of a volatile, unsustainable ascent ahead. S&P highs have moved from 1450s to 1480s to 1500 to 1530 before settling Friday at 1515. Metrics show its trend is strong but leveling and increasingly limited to certain sectors.
Yardeni's chart on the bull-bear dance is a metrical analog to the stat-based explication of John Williams. Since 2008 there have been only brief periods when there was not a volatile intermixture of bull and bear. Underlying economic weakness and an imposed political mono-culture make it difficult to be bullish on America. Given systemic problems, investors must proceed like scouts in the woods. It is what the times give us. The consumer comfort index on February 22, remains at minus 35, far below its 2007 level and even farther below that of 2000. Naturally it is above March 2009 but a new normal of crushed hopes has been impressed on people as the index remains historically low. This abridgment of hope breaks down a humane society into more manageable units leading into a new impoverished order.
Marc Faber, Felix Zulauf and Williams believe there soon will be or perhaps already is a plateau in the indices. A rise likely will continue for several months before the gap between reality, enthusiasm and government stimulation declares itself in a 5-8% correction. Williams believes this correction will expose the de facto double-dip recession America has been in for two years. In the economy as opposed to the markets it is not clear that we ever exited the great recession.
Many advisors suggest 25 - 40% of equities should be ex-U.S. Jim Rogers and Faber have advocated this for decades and made fortunes by aligning themselves with the leveling of the global playing field. But Global ex-U.S. growth has declined although Brent Crude has been between 110-20 nearly that entire period. Egon von Greyerz notes the widening gap between rich and poor in Europe and America as well as elsewhere and insists there will be no growth in Europe in 2014 though their markets will thrive till the shell game breaks down.
The loan/deposit ratio at major banks, now de facto branches of government, has been falling. This goes to the falling consumer liquidity Williams and Faber stress. The banks have more than $300 billion on hand and more of it will find its way to market, boosting asset values. When the indices stumble the Banks will yank money out deepening any troughs. This promises increasing volatility going forward and the urgency of avoiding panic selling. Keep sell-stops in place suited to your needs: a shorter time horizon or more risk-averse portfolio should keep stops 20% below asset prices allowing for weekly fluctuation. Those able to wait for rebounds can set them as low as 33%. There will be pain ahead so have stops in place and check the screen every week. There are no more normal times. Buy-and-hold is gone even for bullion allocations over 10%. It always was a misleading mantra: nearly everything but family heirlooms will in time be sold. Buy and hold now means three months - three years depending on the asset and portfolio. The exception is a low-beta balanced fund that produces decent income and some growth for people who must have a large rainy day holding at hand.
Don't despair at gold's sideways range since December 2011. The 12- year price chart shows a 16-month consolidation from spring 2006 to summer 2007. Moreover, the main drop in the current base-building was from the September 2011 spike at $1900 to $1525 December 29, 2011 most of it occurring in the last month of that 100-day period, worse but similar to what has happened since October 4. Late 2011's 22% correction remains the major drop in gold's ongoing secular bull built on huge monetary expansion and devaluation. From secular perspective precious metals are poised to rise with loose fiscal policies, bullion repatriation, Chinese buying and, in the case of silver, steadily increasing technology-based industrial demand. Gold remains in its mid-bull corrective channel ($1525-1790) begun in December 2011. Since September 14 - October 4, 2012 rise to $1792 the correction has been about 14% so even in a two-year context the current consolidation has been mild. Buying opportunities are now for precious metals while for equities it is time to trim or hold fast till the markets find the next major resistance toward which they are groping. For the miners the bleed of recent months has been far worse, which creates buying opportunities for stocks at or near 52-week or secular lows. "Time is on the side of the longs and solidly against the bears," notes von Greyerz commenting on insolvency. At the end of this piece I will mention several good equity plays.
Still more instructive is gold's 100-year chart. The major trend tops are 1933's fiat re-valuation from $20 to $37/oz, the spikes after the abrogation of Bretton Woods which include the bursts in 1980, '82 and '87 that relate to the major upheavals in inflation and interest rates that occurred in that period. Drawing a line from the 1933 spike through the 1980 top gives target values in the scores of thousands of dollars that some sober and informed people suggest. Because of enormous socio-economic and fiscal changes between 1933 and '71 and the August 1971 creation of the USD as the world's fiat reserve currency makes that a more instructive starting point. It remains a major marker of our passage into postmodernism, which is the fungible, increasingly arbitrary aspect of all valuations. Volcker pushed the Fed rate to 20%. If it was pushed beyond 5% today the system would crash and gold would soar. A line through the 1979-83 spikes gives a summer 2013 price in the $20-30,000 range. It won't happen because of 0% interest rates and pre and post market intervention via COMEX. Factored into gold $1600, accounting for devaluation - inflation would be about $8000. It is notable that this is not far from the roughly $10,000/oz figure some economists have urged as a means of balancing the national budget and returning sanity to the dollar's value. That would happen only despite the matrix of Central Banks - governments' workings. If one looks at the October 1980 spike to $1784/oz and adjusts for USD devaluation one gets the $3500 figure for today that Jim Sinclair has been explaining in recent years. This does not include the fearful expansion of the monetary base the since 2008 that has seen debt climb vertically. It does, however indicate that a substantial rise in gold (and thus silver's) value will occur. One needs to be positioned for it according to one's time horizon and ability to tolerate short-term volatility.
In adding to gold positions, Barrick Gold Corp (NYSE:ABX) has held firmly just above its secular low at $30/share and has massive reserves, good EPS, yields 2.3% and is streamlining operations. Vista Gold (NYSEMKT:VGZ) has wonderful properties. After under-performing for a year it recently bounced strongly off a new secular low of $1.60 and now sits at $2. Below this it is a strong buy. McEwen Mining (NYSE:MUX) held up better than most miners. It steadied about 40% above its 52-week low: put it on your watch list. Silver Wheaton Corp (NYSE:SLW) has continued to drop but still holds 38% above its 52-week low set last May. As a streaming company it is slightly buffered from the cash flow-debt concerns of the miners it services. Watch it and buy below $28/share. Junior miner Reservoir Minerals (OTCPK:RVRLF) was almost indifferent to the collapse. Developing a rich property in Serbia with backing from Freeport McMoran (NYSE:FCX), Reservoir for weeks has traded between $2 - 2.50. Once the high quality of its ore was confirmed in mid 2012 its price soared and as production nears it should rise steadily. Turquoise Hill Resources (NYSE:TRQ) continues to set new secular lows in search of support so caution is urged in that promising venue.
Since bond prices remain elevated (due for a drop, perhaps a severe one) and yields low, underweight bonds and look for unusual dividend plays tied to food and energy. Buy into Vanguard Natural Resources (NASDAQ:VNR), an oil and gas LLP that trades between $26-30. It has average price target of $32 and pays monthly at 8.9% annualized. Sprott Resource (OTCPK:SCPZF) has farmland, fertilizer, oil and gas and gold. Its monthly dividend annualizes to 10.7%. Saskatchewan Potash (NYSE:POT) like the other phosphates is tied to food. POT has sold off 50% in 2 years though analysts have buy ratings on it and it yields 2.86%. Mosaic (NYSE:MOS) is a stronger buy and yields 1.74%. Terra Nitrogen (NYSE:TNH) 6.37% yield & 130% rise in past 3 years is a strong play. Mind the history of major yoy volatility and align your holdings in these mineral-fertilizer assets accordingly. Remember that Consumer Staples is the one sector that continues to trend steadily higher relative to the S&P.
It is time to buy the market including adding to an S&P index. Add some miners and bullion as above. As always, physical like Physical Sprott Silver (NYSEARCA:PSLV) is better long term. The Junior Gold Miners ETF (NYSEARCA:GDXJ) has made several secular lows. If it holds around $16 and begins making higher highs, add. Happy hunting and mind the weather. By year's end major systems crashes will occur. Only the most durable values will survive. Buy this ski-jump market but keep an eye on the exits.
Disclosure: I am long ABX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.