QVMS - The Difference Between 'A Bottom' And 'The Bottom' For Stocks
- There has been a dramatic fall in Treasury yields in the past month and an equally dramatic fall in energy, metals, and agricultural commodities.
- The Ukraine situation holds many unknowns, as it is a major driver of financial markets and there is no end in sight as to when the fighting might end.
- I doubt gold can stage a meaningful rally as long as we have such a strong dollar, as gold is hovering near $1700 an ounce, despite very high inflation globally.
Someone is buying the dips, as we have not made new lows for four weeks and what was once pressuring stocks has gotten better, namely surging Treasury yields and high commodity prices.
There has been a dramatic fall in Treasury yields in the past month and an equally dramatic fall in energy, metals, and agricultural commodities. Such an environment can create a rebound for stocks all the way to the 200-day moving average on the S&P 500 Index, as is customary for such counter-trend rallies, and that would constitute a very nice intermediate-term bottom, what we might call “a” bottom.
For us to see “ the ” bottom that marks the end of this sell-off we need a dovish pivot from the Fed, as well as an end to the hostilities in Ukraine – or a truce at the minimum. The last rally attempt will either fail or succeed and the big test will likely come this week. This chart says it’s make or break time for the S&P.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary
The Ukraine situation holds many unknowns, as it is a major driver of financial markets and there is no end in sight as to when the fighting might end. It can override a pretty legitimate bottoming process for stocks with a one-day spike in the price of oil – or natural gas, for that matter, as gas supplies to Europe can be used as a counter-sanction weapon by Russia. The natural gas situation and the war in general are reasons why the euro got to parity with the dollar, in addition to ECB monetary policy lagging the Fed.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary
Borrowing costs for heavily indebted countries with a weaker fiscal position – like Italy – are surging but so far we are not in the same situation as 2011, when Treasury yields were going down and Italian bond yields were going up. The differential between German bond yields and Italian government bonds has been rising and will likely keep rising should Europe face a nasty recession driven by surging energy costs. We could be in for a repeat of the old eurozone crisis this year depending on how the war goes.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary
In the meantime, the Treasury 2-10 spread has inverted and the 3-month/10-year spread will invert soon after the Fed’s next 75 bps rate hike, expected July 27. The 2-10 spread has inverted before every recession since 1980 (chart). As far as the bond market is concerned, a recession is coming, which could be very shallow and not necessarily problematic for the U.S. economy given the better financial condition corporations and consumers are in, compared to any of the prior recessions in the 21st century.
Gold Market Looks Interesting Here
I doubt gold can stage a meaningful rally as long as we have such a strong dollar, as gold is hovering near $1700 an ounce, despite very high inflation globally. Still, it has to be pointed out that the last time the dollar was at these levels 20 years ago, gold’s price was near $300/oz. so as far as keeping the purchasing power of an ounce of gold, the Midas metal has done more than an adequate job.
Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary
Keep in mind that gold moves in fits and starts. It can stay flat for a long time, or decline, even in times of surging inflation, like right now, but over 10 or 20 years that tends to correct itself. I think gold will stage a monster rally the minute the dollar tops out, which probably should coincide with a truce in Ukraine.
Silver bullion on the other hand is much more volatile and much more economically sensitive. It tends to decline more when gold is selling off, and rally more when gold bullion is strong. Right now, I would not be nibbling in either silver bullion or silver stocks until the gold market bottoms out.
All content above represents the opinion of Ivan Martchev of Navellier & Associates, Inc.
Disclosure: *Navellier may hold securities in one or more investment strategies offered to its clients.
Disclaimer: Please click here for important disclosures located in the "About" section of the Navellier & Associates profile that accompany this article.
Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
For further details see:
The Difference Between 'A Bottom' And 'The Bottom' For Stocks