As we continue through a vicious commodity correction, one wonders where the fear has gone. Looking to the VIX as a measure of market sentiment, the needle has barely moved. Implied volatility of the market (in this case, SPX 500) hovers near 16%, close to annual lows, showing a lack of fear or even high complacency. Contrarily, commodities have nearly imploded with crude dropping more than 13% in a short time while silver has corrected a whopping 28% in a matter of two weeks. The volatility of these and other commodities has gone through the roof – fear of falling prices, which seems logical. Back in 2008/09 the VIX was up in the highest range in years, peaking at 90%! To be fair, today’s issues are not the same as that time period but there are worries. Yet, we don’t see fear in markets today – what gives?
I think we can explain this simply by saying there are market bubbles within a bull trend. With rates so low and profits hitting record numbers that implies equities may offer better opportunity than bonds, certainly better than cash.
It’s not hard to prick a bubble especially in commodities. We’ve been hearing about raising margin requirements multiple times, which is a quick/easy way to remove speculative money. There is no denying the bullish trend of the market has been in place for just over two years. The bottom in 2009 marked a great spot to get long, and there have been few interruptions since. Markets are at/near multi-year highs, something you wouldn’t expect if the economy were going into the tank. Given the recent rise in gas prices, cotton, food and other commodity prices it would stand to reason that markets would be fearing inflation. But alas, long term bonds have been rising and so has the dollar. Now, let me get this straight; bonds are higher (yields down), the buck is starting to gain strength while inflation is up yet inflation expectations have not been adjusted. If inflation is truly a problem wouldn’t the opposite occur?
We heard Chairman Bernanke explicitly last year when he said ‘a little inflation would be good’. I think we have that now, while some experts believe prices are on the verge of spiraling out
of control. I defer to the Fed as inflation fighters supreme, if/when there is some radical change higher for inflation expectations we should expect rates to ratchet up. Until then it is a guessing game as to when not if. That sort of guessing and waiting keeps one sidelined too long waiting for something to happen. The opportunity cost of ‘time lost’ is unrecoverable.
Bottom line, the markets are adjusting and correcting here but there are some good stocks reflecting solid economic prospects. We don’t have to look too hard or too long to find them. Away from commodities, financials materials there are a treasure trove of trading opportunities. Take advantage of them.