Careless talk is indeed a very dangerous tool. The last two weeks of volatility have seen the very worst of press reporting via the usual media channels. Whilst there have been some calming voices, the majority have been too happy to jump on the sensationalists bandwagon. The same happened back in 2017 when the Oil price dipped back to retest support at $42pb after spending some weeks looking strong in the low $50’s. Suddenly all the market Guru’s were calling a ‘bear market’ for Oil and commodities in general. Oil surged to $70 a few months later. The BBC is often the worst. Reporters with little understanding discussing the markets with some kind of self assigned intellectual credibility only then to follow it up with a weather report or traffic update. As mentioned last week, the market is a casino. Volatility is good for the ‘house’. Panic is good. Panic is exactly what generates the extremes. Sentiment can be just as strong a tool as US job data or GDP rates. Sentiment can be affected through media channels. None of this is new. Most investors are fully aware of the machinations of the market or casino as it’s now fast becoming known. But the key difference today compared to a decade ago (Lehman’s / Credit bubble) is that there is no obvious economic dangers. It’s been steady eddy stuff for the last 2 years+ across the major indices. Some would say 6 years+. The opposite could be said of Commodities which have bounced back of late from historic lows and still have a long way to go before they align themselves with the surge in broader markets. This time around there is no sub-prime issue to be wary of. No ‘Greece’ black hole and so on. Of course there are concerns over consumer debt levels, when isn’t there such concerns? So where is the danger this time around. Well, you guessed it. The danger has been manufactured from nothing. It’s as if the Casino got bored and decided on creating the next bubble just for the hell of it. This new bubble is based entirely around the ‘VIX’. This volatility index and other associated products are now unwinding. When will the market learn? Why invent financial products from thin air and then sell them on 4 or 10 x over? Has nothing been learned from the past? When will the market clean up its act? Whilst some will say that the investments in these products are small circa $8bln, it’s the knock on effects from sentiment and related or hinged products that follows that become the real danger. Something as simple as this could eventually return the markets to early QE levels just at a time when Governments are unwinding the free money deals. When a black box in a cabinet starts selling a particular stock which then goes through support levels which then triggers other events such as falls in ETF’s, ETN’s, Spread bets, CFD’s the list goes on… it has no end. The Algo’s just keep selling as each level breaks. Meanwhile, the media channels run around spouting utter nonsense as they try and pin a genuine reason which makes a decent headline, afterall – citing a black algo box or fat finger is becoming abit old hat these days.
The question everyone should be asking now is where were the headlines or panic when the market was rising like a balloon on hot air? The irony is had the DOW not risen to 26700 and instead took some minor corrections over a period of 2 or 3 months from levels of 23500 down to 21500 – most would not have raised an eyebrow. The difference of late is that 3000pts were knocked off in the space of just a few days. After a steady eddy incremental rise of 3000pts over the last 5 months+, the DOW shed some serious weight in a small amount of time. Overdue or not, losing that kind of weight is not healthy. It shows just how over leveraged and complacent the market has become. Perhaps the short sharp correction (assuming it is a correction) is what the market needed, dare I say it… designed specifically to wake a few complacent investors up. Stop the rise to 30k on the DOW now before the likely event? The adage that nothing goes up in a straight line is certainly worth noting. The DOW proved that wrong for many months in 2017… too many months. A reminder of the markets fragility and tendancy to spiral often uncontrollably is perhaps a welcome warning and a long time coming. It’s going to take a few weeks yet before the Algo’s find a new programme or tune to dance along too. So don’t expect calm just yet. There’s more to come simply because the market has to find out for itself what is lurking deeper. A self destructive curiosity act that will ultimately determine the bottom, but one that needs to be done. 21500 looks fine to me. A rough halfway house between 16.5k and 26.5k. Once reached, the upside opportunity to bounce back to 23500 or 24500 becomes rather attractive for all involved. Often, if a ceiling has been reached, then there’s more money to be made on a move down and then a return move back up than just treading water or flat trading. Timing is everything of course, but just reflect on this fact for one moment… Over the last week to 10 days, the DOW has swung around by over 4000pts through several dips and bounces. As a comparable, it took the DOW 4 years to rise from 15k to 19k. And just over 6 months to rise from 19k to 26.5k. Hence, a drop to 19k levels would not be the end of the world by any means, but technically that would be called a bear market and the Algo’s would eat themselves in a way that could send the market much much lower. So the next crisis is indeed around the corner, but it’s easily preventable. Why not bring some bans in on Algo’s? Why not put a brake system in place which takes into consideration ‘now’ the likely impact of Algo and HF trading? It’s about time the ‘Casino’ started to look closely at the animal it has become and do something positive about it. It’s not fair for Governments / Banks to ridicule Bitcoin and try and close it down simply because they feel it’s out of their control. Something that they cannot dictate. Something that really messes with the products that are in their control. In reality, governments should look at the market regulation that exists today and do it a lot better because at the moment, products created around low Volatility are no more credible than Bitcoin. They should be closed down and banned.
So what have we learned from the last few weeks? Well, one thing is becoming clear, the go-to safety of Gold has not yet been fully utilised. At $1310oz, the metal is trading at levels last seen when the DOW had zero volatility. That’s odd. And it should change. A move to safety throughout 2018 could see Gold into the $1400’s with ease. Bodes well for low cost producers like Hummingbird Resources (HUM) as well as those more established players in Highland Gold (HGM) and Centamin (CEY).
Oil is also in demand and whilst the recent US rig count rise suggests more drilling has returned, it is still some 200rigs+ away from where it should be. US shale may well prove to be a short lived issue for the Oil Market. The next 2 to 3 years could see production start falling fast as resources become harder and harder to extract. The permian can only take so much frac fluid before something pops. A testing period which is exactly where OPEC want to be. It might take another year or two, but by 2020, OPEC and all involved should have a much better idea of US shales capabilities and longevity.
Notable observations across equities involved heavy weights like BP and Tullow alongside mid tier players like Premier Oil and Enquest. The latter two certainly took the brunt of the sell off while the bigger players looked relatively unscathed. Selective trading or a sign that the investment banks are happier ploughing money into the Blue chip players rather than the mid caps? That said, Institutional investments across some smaller cap players has been increasing of late suggesting that the move away from Blue chips to higher growth / higher risk prospects might be underway. Certainly one to watch over the coming months across the commodity sector. Should bode well for some explorers seeking farm outs/funding too.
Stocks that look good value due to recent market ‘over-reactions’ include Hummingbird, SolGold, Columbus, Petrofac to name a few. Whilst it feels like a year has already been traded, we are just 6 weeks in. Plenty of weeks to go yet.
Week 6 positions below: