Now Put THAT in Your "Model"

A guy I follow on Twitter, Josh Brown, (You may recognize from various CNBC programs), nailed the quote of the week this week.  "The Dow posted a 1,300 point rally (and is back in a "bull" market now) on the same day that the US posted 3.28 million jobless claims, 4x higher than the highest report ever.  Now put THAT in your 'model'."  Every institution is trying to navigate their multibillion dollar ships through this harbor and doing the best they can to model a logical scenario in which to do it.  Events like these break the models.  Maybe they'll account for that next time around when they build new ones, and then it'll be something else.  But hey, I guess on a long enough timeline, they could literally account for every single black swan event possible.  But that time is clearly not now.

These markets are volatile and FAST, and this week was no exception.  I said a week ago I thought we were at a short term low and expected about a 6,000 point rally in the Dow, with a target somewhere around 2700-2800 on the SPX.  We hit the low (for now) on Monday then rallied strongly Tuesday, Wednesday, and Thursday to 2637 on the SPX and rallied about 4,200 off the low on the Dow before slipping again on Friday to close the week out.  WOW, that was fast.  I certainly didn’t expect to get this close to my target in 3 days, but that just goes to show you the speed and volatility of this market.  We will likely not see an 18 month or 2 year peak-to-trough bear market like we have seen in the past.  It will likely be very fast and relentless, and hit its low in half that amount of time, likely before the end of this year and at levels no one expected.  The Fear and Greed index (https://money.cnn.com/data/fear-and-greed/) spent about a week ranging from 3-6, (on a scale of 100) indicating extreme pessimism and bearishness.  Now it’s at 23, which is still very bearish, but that might be all we’re going to get.  Keep in mind, in situations like these sentiment and indicators can stay VERY negative for a very long time and just keep going down.  We likely won’t see the Fear and Greed index rise above 50 until this is over.  Likewise, indicators like RSI that are “oversold” can almost always become more oversold. Don’t confuse oversold with “buy”.  Often, oversold stocks simply flatline after falling, giving no opportunity for profit from the long side then rolling over and dying again.  (And the inverse is true as well. Overbought does not necessarily mean sell.  In the early 90s, the Dow became “overbought” on the monthly chart as RSI pushed above 70.  It stayed overbought for almost half a decade longer and tripled in that time frame.)

Getting back to the SPX, I still think there is room to run higher here and still believe 2700-2800 is a probable target.  Looking at the chart, it’s hard to believe that blip higher is a 20% move off the low.  Indicators like MACD and RSI are still very negative and have barely come off their lows.  A move into the 2700-2800 area would give a good opportunity to lighten some long positions if you still haven’t done so already.  For traders, that is the level I am looking at to begin shorting the SPX and buying volatility in VERY small amounts.  If 100 shares sounds like a good sized position buy 20 shares.  Online commissions almost everywhere are free now so there is no harm in buying 20 shares 5 times if you have to.  You might find the market taking off after you’ve only bought 40 or 60 of that 100 and you will be wishing you had the whole 100.  But I guarantee you, it’s better to make a little then to go in the full 100 and have the market move strongly against you, giving you no room to maneuver.  On the other side though, I will be eyeing the 2500 level which was Friday’s low to see if we begin breaking below that.  If that occurs, the market could begin selling off again quickly and we will have likely seen the highs for now.  As for the VIX, we began sliding quickly from the highs before the market bottomed, which gave me the indication this rally could be coming.  I had bought the VIX near the lows over a month ago before this sell off began.  My reasoning was extremely high complacency in the market and hedge funds that had been overwhelmingly shorting VIX futures likely because they were bored and because it works 360 days out of the year.  I probably made way more off of buying volatility then I ever would have if I had just outright shorted the market.  That might not necessarily continue, but I do not see volatility going away.  The VIX peaked before stocks bottomed and slide about 30% down after a massive move higher.  Another market saying: “If it’s working, let it work.”  I had a modest target on the VIX when I bought it and it far exceeded that.  As long as it was working, I left it alone and it kept going up.  When I noticed it sliding as stocks still dropped, it seemed like it was getting long in the tooth and I sold.  As long as the basic inverse relationship between the SPX and the VIX is working, let it work.  We might not see an equal performance if stocks start dropping again, but that is why I would split the difference between shorting the SPX and buying the VIX, and again, I cannot stress this enough, VERY small positions. 

Gold has been an absolute mess.  In less then 1 month we have seen it tap $1700, then go down $250  to $1450 and back up $250 again to $1700.  As I said before, people will sell anything and everything without logic or reason in a liquidity crisis.  No matter how bullish the scenario is for gold right now, you have to keep that in mind.  After a ridiculous price gyration like this, I would expect price to gravitate somewhere in the middle as it’s next move.  We seem to have trouble getting above 1700 right now, after tapping it 3 times.  We also didn’t last long at $1450 before it was bid up again.  Somewhere around $1575 would be an area buyers and sellers might find some equilibrium at.  From there, gold’s bullish fundamentals might prevail if we continue higher, but the liquidity squeeze could just as easily take gold down with everything else.

Silver looks very different.  After that massive $6 drop it had from 17.50 to just under 12, it has rallied back about half of that to $15 and stopped dead.  If indeed, gold needs to back off and find some equilibrium between these fast and extreme moves, silver will follow it lower and that could be right back to $12.  Look, silver is stupid cheap in relation to gold, history, mining costs, whatever metric you want to look at it from its cheap.  But that doesn’t mean it can’t get cheaper.  Long term, I am very bullish on silver.  But the market is telling me something that is different from my expectation, which was that silver would follow gold higher and it is not doing that.  There is a clear difference here in the performance of gold and silver.  Silver is trading like an industrial metal, and industry right now is dead.  Gold is the safe haven.  Be sure you’re buying things for the right reasons. 

The Gold stocks are looking better.  It is looking more and more like a major player, or fund in the gold market utterly capitulated their holdings 2 weeks ago when the GDX hit 16, dropping nearly 50% in 6 days. The GDXJ did even worse and rebounded less then the majors.  They are looking like they are going to roll over again here, but we may not retest that extreme low.  I would look at about 21-20 on the GDX as a pretty good time to begin buying some of the miners in SMALL amounts.  I wouldn’t rule out another liquidation though.  You have to start getting insane with price targets in these situations.  We could see 12 on the GDX but I certainly wouldn’t wait for that.  Make sure your positions and your emotions will be ok if it happens, but you should begin buying cheap assets when the market is selling them strongly.  I still believe the safest long-term bet is royalty companies, but the miners are cheap, and they offer more leverage to a higher gold price.  Oil prices have fallen drastically which will see their costs lowered and despite wild fluctuations in gold, the average sale price for miners for this quarter will likely be above $1550, a price they haven’t seen in 7 years.  And these margins are far better now then they were back then, as most miners were pumping as much gold as possible to take advantage of the high gold price and only began to address their costs when gold was falling for the following 6 years.  Like in all things, focus on quality.  Watch out for debt levels.  Newmont (NEM) has crushed the competition into becoming the premier major producer.  There are smaller miners that will likely jump way higher than NEM will, but they could be gone overnight just as quickly.  I’d love to see NEM at 40, that might be as good as you’ll get.  WPM has done very well also.  If nothing else, they have been far more stable places to park money in the gold sector then nearly every other gold stock out there.  22-24 would be a great place to buy WPM.   I still very much like Royal Gold (RGLD) but after it rallying back above 90, I'd prefer to see it back near the 80 region if possible.  There are some smaller miners I know that I would nibble on as well individually, but you should do your own due diligence and look into the balance sheets of some of these companies yourself.  Buying small amounts into the GDXJ on drops when it drastically underperforms the GDX is a good way to get exposure to the smaller miners without individual risk to any one stock.  At about the 24 area on the GDXJ looks like a good place to buy. 

COVID-19 is not getting better any time soon.  As I write this, the US is closing in on 140k cases, and almost ¾ million worldwide.  New York is nearly half of all US cases.   The hope that it will die off as weather gets warmer was looking logical, but now we are seeing warmer climates begin reporting cases.  South Africa is on lockdown, and it’s logical that they have far more cases then they are able to test for right now.  This morning, Dr. Fauci said we could have millions of cases and the US could see 100-200k deaths.   We had an unbelievable expectation for jobless claims; 1.5 million, which would be the highest report ever and we doubled it.  People are beginning to realize they will not be headed back to work or school any time soon.  On Saturday, it was reported Trump considered a lockdown of New York, New Jersey and parts of Connecticut.  This will likely be a reality at some point.  The panic has yet to peak.  The Fed has pulled out the stops, pledging to prop up every market for as long as needed and as much as needed.  The only asset class they have yet to commit to buying is stocks outright.  (And they’ll get there too).  Congress just passed a $2 trillion-dollar stimulus package, of which they are giving a whopping $1200 to (some) individuals and reserving the rest for corporate bailouts.  They won’t even roll out the checks before more money is needed.  This will not be the last stimulus package, I’d expect at least 2 more, of increasing amounts.  They will continue to bail out as the bankruptcies keep popping up, and I believe the backlash will be great enough to ensure the general public does not get left out entirely, so we will likely see more stimulus checks and measures to help individuals as well. (Pennies in the grand scheme of their spending).  Everybody is going to implode with debt.  This is nowhere near done with and there isn’t enough information to try and calculate the damage that has already been done to the financial system and the world economy.  You can’t model this.  The only thing we can do, is protect ourselves with enough liquidity and be calm and deliberate buyers as markets move drastically lower.  Decisions made in panic are rarely good ones.  In the market and in the rest of the world out there as this infection gets worse, be calm and deliberate in your decisions.  Good luck next week.

-Jonathan M Mergott