A Couple of US Markets Offering Discounts

The S&P500 retreated another 0.97% last week. Volume was on the light side, so once again, there was no rush for the exits during this minor sell-off. That said, volatility did make a more notable move. The VIX index jumped from the low 11 range and temporarily rose to about 18. While 18 is still not a level associated with panics, this move in the VIX suggested that many traders were buying protection against potential losses in the future.

From a technical analysis perspective, the S&P500 is still extremely overbought, despite the recent weekly retreats. This is especially evident on the weekly resolution where the closing price is still far above the 200 day moving average. On the daily charts, the recent retreat brought prices close to the 50 day moving average. And since this moving average has provided a very consistent “buy the dip” signal over the last several years, there is a good chance that the S&P500 will be bought again, now that it’s dipped back down to the 50 day moving average.

The long-term indicators, for example the 200 day moving average and our Simple Rule, are still suggesting that the cyclical bull market is still very much in effect. So for the time being, the correct position is to remain net long the S&P500.

Meanwhile, there are two much smaller US securities markets that have suffered serious dislocations recently.  Both the baby bond market and the preferred market have incurred major price reductions over the last two weeks, primarily as a result of the rise in US Treasury rates.

Many preferreds and baby bonds, often rated investment grade (say BBB or higher), have fallen from average prices of around $26 per share to $22.50 per share. While it doesn’t sound like much, a 13.5% drop in price, over a span or 10 trading days, is a severe fall for these securities. The big opportunity, of course, is not the yield pick-up to be enjoyed by buying at the current depressed prices, but the anticipated one-time capital gains that would accrue as the prices returned to $26 from a starting point of $22.50.  Specifically, this would represent an 18% gain.

So while the S&P500 remains not that far off its recent all-time highs, and while both investment grade and high yield bonds remain near record tight spreads, there are some areas where investors—and granted this applies to smaller, non-institutional investors only, because these two niche markets are too small to accommodate institutional investors—can find some very attractive, and relatively safe, bargains today.


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