I look and look for compelling reasons for the latest declines and can find nothing equivalent to the amount of the declines. I hear on financial channels: "The markets are under pressure." What is this "pressure" exactly? Over the past few months, this statement is more true than usual. But, this is nothing new. "Pressure" is omnipresent in the stock market and accounts for much of the volatility.
My read on the latest 90 days or so is that the decline in market prices for all stocks, bonds and commodities are due more to a removal of upward pressure than an increase in downward pressure.
The truth is that markets are always under pressure but from top and bottom. Sellers (that is, short sellers) are placing their bets on a decline in the price of something. Buyers (holders) are looking at the same data and projections and seeing reasons to be optimistic. Although the big news events are always highlighted by the biggest index moves in a day or in a week, the truth is that the larger moves can be more easily caused by a removal of one pressure than an increase in the other.
An explanation: Prices for any commodity, like corn, gold (GLD) or oil (DIG) (OIL), are always being pushed up and down simultaneously by forces that are more or less equal. Most often they are being pushed up and down by multiple forces in both directions. Gold (GLD) (GDX) is influenced by a confluence of reports on over-printing of paper currencies, by fears about the future viability of the EU and the Euro, by reports of large holders buying or selling (See here and here), by reports on fighting in country X or Y (or the cessation of fighting there), by a report of a "massive" gold find by new gold companies, by the cost of energy to mine and refine the ore and by a dozen other concerns. Recently, Merkel and Sarkozy held a press conference to try to add clarity to plans to bolster the EU and the EU nations and clarity was difficult to find. And, like a scrum in rugby, made up of equally rotund and muscular players pushing in opposite directions, these forces can create a stalemate on the movement of the pile ... until one foot on one player slips on some mud or is improperly placed for the best leverage (that word has multiple meanings when used in a sports/stock market metaphor) and suddenly, the whole pile of players will move 5-10 feet one way or another until equilibrium is reestablished.
Similarly, investor confidence has too many reasons lately to be lowered and to remove - as a result - the upward pressure causing a lack of equilibrium between upward and downward pressures ... the downward pressures have their moment in the sun.
As has been said for decades, the markets don't like uncertainty and the past few months have provided plenty of that, causing buyers to hesitate. But, apparently, the currency and equity markets also don't like certainty when that certainty points to prolonged monetary and fiscal policy that is either immature or shortsighted and, in this case, we may have an equal dose of both weaknesses.
Pressure is always working in both directions on the markets and commodity prices and when the bullish pressure is removed only briefly, the declines in values can be swift, as we are seeing.
In addition, it seems that the removal of positive pressures is usually more distinct than removals of negative pressures -- probably due to the old adages about good news and bad news. Bad news travels fast -- implying that it travels more quickly than good news. Positive pressures are timid and come back gradually, while negative pressures are bold and return quickly after a moment of hesitation.
Why? Well, as they say in the news business: "If it bleeds, it leads." Bad news thus gets more attention and ink and thus has a more severe result of removing positive pressures than good news ever has a chance of removing negative pressures.
So, although this is no absolute consolation, holding is always the best strategy and one must always keep this in mind as times are good. When things are strong, you can follow the old mantra and sell into weakness but you should always keep in mind that downward moves are usually (near always) more frenetic than upward moves and so, one version of "selling into strength" is to always get out of margin and frequently get into a small cash position when you are up.
Everyone must develop their own rules for this discipline, but I consider "strength" to be an upward move in my holdings of anything greater than 15% in any trailing 6 month period; I don't expect 30% per year rises and I know I'm not that good to do it very often.
But the reverse is also true. Buy into weakness. If you have cash or do use some minor margin buying power, now is the time to get into (or add to) your GLD, your GDX and/or several other commodity or PM stocks. Gold took a bit of a hit in the last week from its spikey top of $1822, but it has been incredibly resilient and -- after a modest 5% consolidation -- is enjoying renewed buyer interest around the world. And, YTD, the GDX gold miners are 25-30% off the pace of gold's rise in value which is an anomaly worth noting; whenever this has happened in the past several years, GDX then appreciated at a faster pace and caught up to being on par with gold - even as gold continued to rise.
Another stock I'm amazed at recently is MGM (symbol "MGM"), which is selling at a P/E under 3. UNDER 3. MGM is THE franchise name in casino gaming in Las Vegas and around the world, which includes world class entertainment, vacationing and eating venues. They control 70-80% of the best properties on the strip in Las Vegas. A P/E of 3 is oversold with a capital "O" -- which just happens to be the name of one of MGM's world class venues, the "O" at the Bellagio.
Disclosure: I am long GLD, GDX.
