Today the DOW futures are down again over 200 as I write this. The market is overdue for a bounce to say the least at this point, but you need to understand WHY the market fell so bad in the last half hour of trading yesterday. There is more to it then just fears over a virus that has already peaked in China.
Yesterday the S&P 500 and DOW both fell hard into the close when frankly they should not have. The VIX spiked up and came down during the day to show that a panic washout happened in the morning, but that signal got negated on the close as the averages simply dumped to cause the VIX to go back up. This is not normal stock market action and has not happened in the markets since late October 2008 when the market would have huge down days as part of the Fall crash of that year.
Why is this type of selling happening now?
Margin call selling took place. It happened like this multiple times in 2008. What happens is that a market that is already down 7% or more from its highs and then has a giant gap down on the opening traps people – especially those on margin.
People already on margin cannot do anything on the open to buy and can only hope that the market can bottom or else they will be forced into selling. So the market tries to rally and when the rally fails margin players dump in mass on the close and when they do it they sell just about anything they can and sometimes everything they have. That’s why the big selling happens on days like yesterday in the last 30 minutes.
It doesn’t mean the stock market is going to crash today, but that things are changing and that means things are uncertain for the short-term.
Silver went down, but so did the US dollar. Many long-term bears I see on the internet have been saying that the dollar would go up in some 2008 style crisis – but this is not 2008 and the dollar went down yesterday. And forget about Bitcoin as it is still useless junk.
But even though gold went up mining stocks went down Thursday. They got caught up in the market volatility. Big drops like yesterday cause widespread forced panic selling. That can hit all stocks so I think that is what happened with the miners. Once this market short-term meltdown is clearly over look for them to quickly rebound. The time we are in for the markets reminds me of August 2007 or April 2000 actually more than the 2008 – as the market had key breaks those months that signified a change in the big macro picture, but then rebounded sharply after those first drops happened.
So when I see the market do what it did yesterday despite the reversal attempt in the VIX and all of these other things it tells me that we are in an uncertain moment in the market. It’s hard to want to go out and just buy stocks and be a hero and no need to do so, because once the market does bottom it will just go sideways for months anyway.
One thing that is certain though is that gold is outperforming the market. Take a look at this chart of the gold/spx ratio, which compares the performance of gold to that of the S&P 500. When it goes up it means that gold is outperforming the S&P 500.
As you can see this ratio made a key bottom in October 2018. That was right before the fourth quarter decline of that year began. Then last year it lagged the market until May when all of the calls for rate cuts began. It lagged the market since Labor Day a little (although it barely fell), but now once again is surging up again in terms of outperformance.
While gold is now trading above $1600 the S&P 500 is over 10% off of its most recent 52-week high and a lot of things are trading out of whack. Gold is the only thing certain in these markets now going forward (except a final peak in the US bond market when the next round of rate cuts come) and the only thing that will be certain over the next decade. Gold is not only a way to beat the market, but will one day be seen as a necessary investment even by those that say otherwise today.
Yes gold will have its daily fluctuations, but that chart of the gold/spx ratio shows you that now overtime that ratio is trending up. There will be spikes up and down from that trendline, but the trendline is up.
I did an interview with Carmine Savastano about his new book Human Time Bomb: The Violence Within Our Nature. In this we talked about linkages between individual factors for aggression and organized state violence. Herd psychology is a very real thing as the stock market shows us from time to time. To listen go here:
-Mike
