Last week’s sell-off didn’t follow through, as most risk asset markets bounced right back on the buy-on-the-dip mentality. It seems as though many investors are convinced, absolutely convinced, that stocks can never drop meaningfully ever again, because the Fed’s policies will prevent that from happening. Never mind that the same Fed, and even some of the same policies, failed to prevent two 50+% drops in stocks in the early 2000’s and in 2009. This time is different.
The S&P500 climbed over 2% last week, on the usual super low volume. And volatility fell back down to the ultra complacent levels last seen over five years ago, in the build up to the last crash.
US macro data was horrendous. Pretty much ever data point, except initial claims, missed expectations badly. Wholesale trade plunged. Retail sales, both headline and ex-autos, collapsed. Consumer confidence tumbled, in what turns out to be the biggest miss in its history. Business inventories plummeted. And while initial claims beat the forecast, this number will in all likelihood be revised higher (worse) next week, as it almost always has been over the last four years.
Technically, the over-bought and over-bullish condition in the S&P is even more extreme than it was last week, when it was only slightly alleviated by the prior week’s sell-off. Market breadth, while weakening, is also somewhat over-stretched. So technically, equities (and high yield for that matter) are prone to a sudden reset. Because it seems as though everyone is on the same side of the boat (long and heavily so), even a small ripple in the water could cause a significant sell-off, one that’s certainly greater than 10%.
Speaking of significant sell offs, there are few pockets in the investment universe that are deeply in bear market territory. While almost all risk assets are near all-time highs, miner equities, commodities and especially precious metals have recently sold off hard. Arguably, some have even crashed.
Newmont Mining, a member of the S&P500, is now down almost 50% from its 2011 high. Cliffs Natural Resources is down over 80% from its 2011 highs. Even mighty Freeport McMoran is off almost 50%.
At the same time, copper is down 29% from its 2011 highs. Oil is down 23%. Gold is down 27% and silver is down a remarkable 52% from its 2011 high.
And for the last year, coal stocks remain deeply depressed. Peabody Energy for example, at about $20, is down about 73% from its highs in early 2011.
So while most risk assets in the world are not only over-bought but arguably in bubble territory, there are pockets of great value to be found.
Does this mean that these depressed assets can’t go down further? Of course not. In fact, they may fall, temporarily, a lot further. But assuming the simple adage of buying low and selling high still holds—and it does—then buying any of these depressed assets today, and scaling in more if prices fall further, means that investors will certainly NOT be buying high….which is what most folks who are currently rushing into the stock market are doing today.