There is a big stock market prediction guru out there now predicting a stock market crash on July 1st. Somehow he is picking out this day as a day of total doom. It is kind of the complete opposite of the America 2.0 guy who is always predicting endless gains.
At the same time a meme began to spread on Monday throughout the trading world that next week’s July 1st day would force billions of dollars in stock selling by money managers around the world in order to rebalance portfolios.
CNBC picked up that story in an article they posted Monday morning titled: There’s a wave of selling estimated to be in the billions that’s about to hit the stock market.
Personally I did not want to get involved in spreading these rumors, because I think they are wildly exxagerated.
Yesterday’s market drop though was real and does make rumors like this spread as people look for reasons to explain the day’s action.
But most likely the market will still be able to hold here for a few weeks before really making another meaningful move as I explained in a post eight days ago now in which I simply stated that “the averages now look set to drift between their recent highs and their 50-day moving averages for the next few weeks.”
I still stand by that.
As for rebalancing it is true that there is going to be some of that happening because it happens every month and every quarter.
Rebalancing happens when an account is devoted to having a certain percentage of money in stocks and the rest in bonds and safe havens. So for example if you are 50% in stocks and 50% in bonds and the stocks go up while the bonds don’t at some point you’ll need to sell some of the stocks to buy bonds to get back to your 50/50 allocation. That’s how you rebalance an account.
And yes a lot of money managers do that sort of thing on the first of the month.
But this is not a secret thing – everyone in the trading world knows of this and so there are going to be people looking to buy if the stock market sees selling based on that – or to even now front run such selling in the futures and options market and all of that activity serves to limit any impact of one day selling when it comes.
This is a wildly exaggerated danger. It’s a story made to generate clicks through fear when there are more real things to worry about.
Never in fact has rebalancing like that triggered a one day stock market crash.
It’s just not something to worry about in itself.
However – it does reveal something important.
All investors need to have a portion of their money in safety. Being 100% in stocks is not diversification and it is not safe, but when bonds yield nothing there is no value to them.
So money managers now can no longer safely use only bonds to diversify.
They need something else.
And that something else is gold.
Only a small amount of money going into gold that would have gone into bonds drives gold up.
This little reality has already caused gold to outperform the stock market this year and will only make it continue to do so from now on.
In the end I find predictions pretty useless and focus on the big trends and look for changes in them.
So when people are talking about rebalancing next week instead of fearing stock market crashes over it the thing to do is think about what is truly going to benefit – and that is gold, silver, and mining stocks.
I talked about them and the broad market in a podcast with Dave Skarica I posted on the site Tuesday. If you missed it you can find it here:
-Mike
