If
October has held any surprises for anyone so far, it has to be the bears. While volatility has been in evidence, the
crash that some analysts were predicting has so far failed to materialize.
One
reason for this was the increase in short interest leading up to the start of
the month. According to short interest
data provided by Consensus Inc., bullish sentiment has been declining for the
last few months and recently hit a low for the year to date. Investors and advisors alike, it seems, have
been growing more bearish and had a less-than-favorable outlook for the market
heading into the debt ceiling limit debate.
Now
that the worrying is over in Washington, investors will get back to the task of
surveying the investment landscape for opportunities. Sentiment will undoubtedly improve as fear is
(temporarily at least) removed from the market.
The lesson investors can take away from all this is that it rarely pays
to lean too heavily to one side of the trade when everyone else is doing the
same.
Barron’s published an interesting interview
with trader Jim Rogers. He was asked if
the record levels of liquidity created by the Fed in recent years should push
the stock market even higher. He
responded by making the observation that Fed money usually goes into financial
markets, but that the advance is getting narrower. He pointed out that fewer big stocks are
rising, a trend similar to the one preceding the 2000 market top. I found his final remark in answering this
question to be enlightening: “I don’t know how long this will go on, but it
can’t go on forever. That said, you
can’t really short this market either.”
I
think that sums up my sentiment on this market perfectly, viz. the market
advance is clearly narrowing with many internal divergences visible in recent
months. It reminds us of the big
divergence in the Advance-Decline line and new highs-new lows that began in
late ’98 or early ’99. Yet I don’t
believe this market is “shortable” just yet.
There’s too much residual momentum still in play with the last few
trading sessions a case in point.
Barron’s also asked Rogers to share his
outlook on gold. Rogers indicated that
he still owns gold but is currently not a buyer. He points out that any asset class which rose
for 12 straight years is anomalous and that a 50% retracement from its peak
would take gold near $960. He added that
50% correction can be “quite normal.”
“I
know of nothing that has gone up for 12 years without a decline,” he said, “but
I’d also expect the correction to be different from normal.” He added that he expects another buying
opportunity for gold in the “next year or two” and that his long-term outlook
calls for gold to eventually go “well over $2,000.”
Rogers
views on commodities tend to be prescient, so I won’t contradict him on either
point. There will, however, be
worthwhile trading opportunities in the yellow metal in the interim. One such opportunity may soon be approaching. Consider that the gold price has recently
reached its most oversold technical condition in over a decade, according to
the 10-month price oscillator. This
suggests an interim bottom should be near.
Meanwhile, a Federal Reserve governor recently
credits the central bank with inflating asset prices since 2009 through its QE3
program. Housing prices have also risen
thanks to the Fed; the median single-family home price was reported up 37.3%
through August after hitting bottom in January 2012. The Fed is also trying to take credit for
creating jobs via its monetary stimulus policy.
Yet that obscures the other side of the coin in the
recovery. While housing starts and
housing prices are up, construction jobs are not. As Ed Yardeni points out in his latest blog
posting, “Housing starts are up from a low of 478,000 units during April 2009
to 891,000 units through August of this year. Yet residential construction jobs
are up only 162,000 since they bottomed during January 2011, to 2.1 million in
August. They are still 38% below the record high during the spring of 2006.”
“So far, the so-called
‘wealth effect’" hasn't created too many construction jobs,” Yardeni
observed. So why has the pace of
recovery in the job market been so sluggish compared with the recovery of asset
prices? Chalk it up to the underlying
dynamics of the 120-year cycle of inflation/deflation. That cycle is down for one more year and
until it bottoms there will always be a cyclical cross-current of deflation
within the economy no matter how much artificial inflation the central banks of
the world try to create.
The working class is still in the process of unwinding the
debt and excess from the “party years” prior to the credit crisis. Wages for the average worker, moreover,
haven’t kept pace with the increase in retail food and fuel prices of recent
years. Until this dynamic changes –
which means either prices have to come down or wage go up – and until the
deleveraging has completely run its course, economists have no reason to expect
anything to change anytime soon.
