Recent Weakness in Equities, Commodities Is a Buying Opportunity

A few weeks ago we read an article on SeekingAlpha titled “The Most Hated Rally in History” or at least words to the effect. That headline sums up everything about the rally in equities since its lows of March. Few genuinely want to believe that perhaps we are in the midst of a bull rally that will extend well into next year. We say “genuine” because any bulls that may have existed just two weeks ago have all but disappeared. Anyone now coming out with bullish commentary on blog sites attracts the wrath of the “masses”.

In addition to this there still seems to be no shortage of so called experts making comparisons to the 1930s claiming that this is the start of the next big leg down taking the S&P to below the lows of March.

We could understand this behaviour if equity markets had already fallen by 15-20% over the last month. But the average equity (as per the Value Line Index) has only fallen by 9% since mid October. Furthermore there has been no breach of any support level of significance in equity, commodity, fixed income, and real estate markets and equally no breach of resistance by the USD Index.

Perhaps the nightmare of late last year and Feb/March this year is still to vivid in everyone’s memories and is still reflected in the prices of major market indices. Of course, time will tell.

Below are indices representing the major asset classes that we think are reasonably good proxies for the performance of each asset class. We have tried to pencil in what we think are obvious support and resistance levels. Yes we note the recent weakness but also note that markets do not move in straight lines nor are they characterized by low levels of volatility all the time. We believe that what we are currently witnessing is merely a correction of a short term overbought condition, absolutely nothing more than that.

The recent weakness in equities and commodities is a buying opportunity. Why do we get that feeling that this market is going to move much higher?

Disclosure: Long VTI, GSG, IYR, UDN, TBT, AGG

Comments

[ArtfulDodger:]

Good article. Good points, TM, especially about the wrath you'll receive around here for a positive article.

There must be 10,000 articles written in the last 10 months on this site alone stating with absolute certainty that the DOW, S&P, and China are all in---what else?---bubble territory!

And after the current corrective wave you can expect another 10,000---keying on what word, one obviously learned well in the last few years: bubble!

Well surely, one of these days they're going to be right.

After years of predicting doom, Panzer, Roubini, Grantham, Faber, Prechter, and even old Granville stuck his head up a couple of times to yell fire, in 2008 they were finally proven, well, "right." What else?

And when the DOW was around 6500 they called for 2500, 3000, or 3500; and now that it's up 3000 points every tiny pull back is another bursting bubble, another crash on its way.

Hell, if they were to be right, who could trust their predictions but the ever-ultra, perma-cynic?

I advise young folks who are new to investing not to listen to predictions of doom or bloom, but to find worthwhile companies, with strong balance sheets, essential products, proven management, with strong future earnings potential, that will have a better than average chance of surviving the doom and taking advantage of the bloom.

That is how you get ahead investing in stocks---not concerning yourself with predictions of either doom or gloom.

Nov 02 09:17 AM

[enigmaman:]

Good article and good points for sure, but Im not sure you get the point about this rally, its not that its hated, to a fundamentalist it just makes no sense, sure a certain amount of snap back from the March lows was expected, but fore the market to act as if the March lows never happened is troubling to many. The rally has been on low volume, extremely low VIX and without the benefit of main street participation so you wonder what is behind this move, is it just the falling dollar as everyone seems to believe? Isnt that dangerous, like a farmer planting all its acres betting the entire farm on a nearby drought will last long enough to drive the price of its crop to unprecedented prices? Is that what a prudent farmer would do?

Then the last month the market seemed to catch a cold, stopping going up and started to move sideways, volatility increased, volume increased on down days, serious swings from one day to the next, bad news on Monday is then good news on Tuesday, main street investor no where to be found, happy sitting on cash.

With all the talk about how strong this market is, many ask, is it really, for every + found there is an equal and or more onerous -, then you have the untenable spending, pending increases in taxes, costly legislation as well as everything else and there are serious concerns that this will bring down the economy in a W, it appears the markets will leave that fight for another day and make money while the sun shines, but that doesn't change reality and thats the concern

Nov 02 10:49 AM

[John Galt:]

Artful dodger-

I agree with you, but in reality predicting what's going to happen in the market or market timing in general is very difficult.

If in 98' and 99' you were predicting a stock market crash due to over priced tech stocks but it never came... would you be wrong?

Predicting the market isn't just about predicting companies, it's about predicting expectations and people's view of this company.

You might have been sure during the tech bubble that Joe Public starting Pets.com with a 400 PE ratio was destined to fail, but as long as people believed in the power of the internet to transform Pets.com... you'd be shouting to deaf ears.

I'd also agree with the author, this is certainly a most hated rally.

Nov 02 01:08 PM

[Mad Hedge F...:]

ati The scariest costume I saw on Halloween worn by a kid dressed as the Dow Jones Industrial Average. Listening to all of the gnashing of teeth and hand wringing after the Friday close about broken trend lines, accelerating downside volume, and crisscrossing moving averages, you would think that a time machine had just magically transported us back to the dark days of March, 2009. The volatility index (VIX) has popped from 20% to 30% in a week. Impressive. A new CNBC poll says that two thirds of investors are now expecting a “W” shaped recession, and that the next big move in the market is down. Once all of the performance chasers finally got the equity weightings they should have had last March, the market could only go down. We cut through support in the S&P 500 at 1050 like a hot knife through butter. Next stop: 980. Then hold your breath.

Nov 02 02:04 PM

[Plant the s...:]

Good level headed commentary, to counter emotional fear mongering throughout this site. There are reasonable arguments for a 2nd downturn, but you need to also accept the economy has recovered from its bottom at the beginning of the year and the 2nd depression is not happening.

Nov 02 06:11 PM