What’s on Sale, and What’s Not on Sale

After bouncing back the prior week, the S&P500 dropped almost 3% last week to register one of its worst weekly losses over the past year. Volume, as it usually does on down weeks, jumped up. And volatility also increased. So the sell-off was confirmed by volume and volatility.

The technicals are now more bearish than they were a week ago. In the short term, instead of continuing its bounce, the S&P promptly reversed course and dropped far more than it had gained during its bounce. This result now removes the constructive stance seen in last week’s daily charts. The longer term weekly charts were bearish last week and have now become more so. The S&P has now had over a month to recover to old highs, and yet it has failed to do so. This suggests that there is more serious concern that the familiar pattern of three steps forward and one step back (or simply, buy on the dips) may now be ending. If the S&P500 closes down meaningfully this week, then this could spell even more trouble for long-term bulls who have done very well by buying every dip over the last three years.

In macro news, durable goods orders absolutely imploded. Both headline and ex-transportation results were atrocious—instead of rising as predicted, both dropped, substantially. The Dallas Fed survey badly missed expectations. Pending home sales as a disaster. And the first estimate for 4th quarter (2014) GDP growth missed.  On the positive side, new home sales beat consensus estimates, as did initial jobless claims (but remember, initial jobless claims were doing just as well in late 2007, about 6-12 months before the economy—and markets—imploded) and Chicago PMI. The bottom line is that US economic activity is just muddling along, never having reached strong and sustained organic growth since 2009.

Finally, as we touch on the various major financial markets available to investors, it’s worth summarizing just where we stand today, from a value standpoint.

Over the last several months, several major markets have corrected, and arguably crashed, to the point where one can claim that they are “on sale” and offer investors substantially better value than they did only six months ago.

Oil has fallen well over 50% and is now a much better value. Copper has fallen a great deal, not quite as much as oil, but enough to begin to attract long-term value investors. Iron ore and coal have been very cheap for a while now. Other commodities are also on sale. Grains such as rice have fallen to levels last seen in 2009-2010. The same goes for corn and soybeans. In foreign exchange, the Canadian dollar (in US dollars) and the euro (also in US dollars) have fallen substantially. US high yield debt has dipped in price, but is not on sale the way these other markets are.

What’s not cheap?  Just about the only major risk assets that have not fallen much or at all—US equities and US investment grade corporate debt. Both remain very near their all-time record high price levels and both are clearly not on sale. Also, US Treasuries,while arguably on sale about a year ago, are no longer cheap—with the US 10 year now yielding only 1.65% down from about 3.0% a year ago.

The good news is that for the first time in several years, several major asset classes are on sale.  A year ago almost everything was seriously over-priced and difficult to buy from a long-term value perspective, at least today, patient value investors have some good options to choose from. By no means does this mean that the assets that are “on sale” will not get even cheaper, but if they do, investors can ride out the further dips knowing they avoided the first 50%+ of the price drop.

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