'Schizophrenic Nature' of the Market Could Point to Significant Pullback
As significant volume in the markets is being driven by momentum-based trading programs, we're racing toward an inflection point.
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Investors can be forgiven if they feel at least a little whipsawed, given the market action of the past month and a half.
The NASDAQ opened September with its worst weekly performance since 2022. The S&P 500 also had its worst week of this year. Then, last week, both indexes managed to claw back nearly all of their previous weeks' losses, in what was their best week of the year.
The first two weeks of trading action eerily mimicked that of August, where the VIX briefly breached the 60 level for the first time in more than four years to open the month.
I think the recent spike in volatility and broad back-and-forth swings in equities is a testament to how much volume in the markets is being driven by momentum-based trading programs right now. I think the almost schizophrenic nature of trading over the past month and a half could also be pointing to a significant inflection point in the markets: one where markets either melt up and hit new all-time highs or suffer a significant pullback. If I had to bet, I would lean toward the latter scenario, given the extreme valuations of equities right now within an uncertain economic environment.
All eyes will be on the Federal Reserve this week as the central bank is set to start to lower interest rates. The only real question is whether we will see a 25-BPS or 50-BPS rate reduction and what the commentary will be following the FOMC meeting concluding. I personally am hoping for a 25 BPS cut, as a 50 BPS reduction would smack a bit of some desperation, given that the inflation fight is still far from won and that we are still some ways to hitting the Fed’s official 2% bogey.
I think a rate cut will do little for the market, given that it has been anticipated for some time. It will be marginally helpful to the housing sector as average mortgage rates have already fallen to their lowest levels since early in 2023.
Housing affordability is still near historical highs, given the home price appreciation since the pandemic, not to mention the increases in property insurance and taxes. Lower interest rates will be welcomed in the commercial real estate market. However, with many office building values having fallen too far below equity levels, default and delinquency rates will continue to rise as loans need to be refinanced.
I have used the dips at the start of August and September to build positions in some gold-related concerns using covered-call orders. These include Newmont Corporation NEM, A-Mark Precious Metals, Inc. AMRK and, more recently, VanEck Gold Miners ETF GDX.
Gold miners are one of the few parts of the market where I am finding some value. Gold continues to hit new highs as the U.S. is running a fiscal deficit of nearly 7% of GDP, even at is debt-to-GDP ratio has never been higher. Being a non-yielding asset, gold also tends to do well when interest rates decline. The rate of inflation in extraction costs has moderated and some of world’s largest central banks (not ours, of course) have been net buyers of the yellow metal in recent years — a trend that feels likely to continue.
And that is how I am trying to zig while equities zag and as the market has taken on a bit of a neurotic tone in recent weeks.
At the time of publication, Jensen was long AMRK, GDX and NEM.
