Not too long ago we mentioned the importance of watching market sentiment as an indicator to help determine how much risk should be applied within investment portfolios. Since that short time ago, the markets have swung more than an Elephant at a hedonist camp.
From the sentiment lows our graphs depicted in June to sentiment highs a few weeks later back to extreme lows as of this scribing. Little did we know all this would accompany historic declines in equity markets.
In fact, according to research from Tony Dwyer of Minyanville.com the financial markets have not been this oversold in quite some time.
“To give you perspective on yesterday’s decline, according to my stats, declining stocks outpaced advancing stocks by 67-to-1.
To give you perspective on what the financial press is calling the “Barack-o-lypse Now” decline yesterday, (due to the president’s comments leading to an acceleration to the downside) — dating back to 1940, the others that came close were:
~5/13/40 (66-to-1). German tanks broke through French armies during WWII.
~5/21/40 (63-to-1). Again, investors were stunned by German advances in WWII.
~10/19/87 (38-to-1). The Black Monday crash.
~11/3/48 (36-to-1). President Truman was re-elected. Investors didn’t like that.
Declines like the past 12 days are very rare and typically are followed by a violent double-digit reflex rally and then a retest of the low.
There is no question it will take time to make an intermediate-term bottom similar to any other major low in the past.”
I quote this for those that may be wondering what to do next.
With that, it is important to also note that during liquidity break downs nothing goes un-spared. Yes, even the precious assets of Silver and Gold that you can’t find anyone to say anything negative about will get sold off.
The leaders and icons going into crisis are rarely the same as the ones that exit.
That could be good news considering the current state of affairs. Watch this carefully, especially over the next few days with gold moving higher and silver moving lower over the past week.
This kind of negative divergence is not a sign of a healthy commodity market. It won’t matter until it does and that will be a sign letting you know when to put some good ol’ green back to work.
At times like these all the typical indicators and analysis gets thrown out with the baby.
However, there are patterns that tend to replay themselves as I repeat the quote above, “Declines like the past 12 days are very rare and typically are followed by a violent double-digit reflex rally and then a retest of the low.”
For those of you like the Quiver client base, that have cash on hand, you’ll want to be patient and wait to see if a low can get formed here and retested.
Amazingly, we sit very close to the lower risk entry point we wrote about just over a year ago. Little did we know this point would be reached in so few days.
For those that have remained invested as the decline has picked up steam and have experienced some loss of sleep …. depending on your time horizon and risk tolerance, you may want to hold on for a reflex rally and then decide to reduce your risk.
Of course there is more than one way to skin a cat and not enough time to cover them all so I encourage anyone that has specific questions pertaining to their situation to contact us or join us on August 25th when we will discuss Making Chaos and Crisis Your Friend.
Befriending crisis is an art all investors will want to seek some guidance in, as I get the sense the next year in all financial markets will be very exciting with some spectacular declines and thrilling advances as we move into the next phase of debt destruction and shifts of social mood.
In closing, I’d like to answer the popular question being raised recently. “Are we heading into a double dip recession?”
First, I’d like to state the belief that we never un-dipped from a recession, and yes, if you follow the recent downtick in economic reports, recessionary signs are already occurring.
History has shown us that the average decline in equity markets during recession is between 30 to 40% and we have only seen declines of approx. 17% from the April highs.
This by no means is forecast or prediction but should be respected.Money can and will be made during this time.
Just like the leaders entering a crisis are not the same that will exit it….The investments that were leaders into recession will not be the leaders exiting.
The opinions expressed are those of Colby Mcfadden and Quiver Financial as of August 9, 2011 and are subject to change due to market or other conditions. This is not a solicitation or recommendation of any investment, always consult a Financial Advisor before investing into any investment. Securities offered through Newport Coast Securities member FINRA/SIPC. Advisory services offered through Newport Coast Securities a SEC registered investment advisory.