Bullish Signs, The Fear Index, Looking For Bottom

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Commodities, Macroeconomics

Rules to live by: enjoy the company of a cynic but by golly don’t marry one! Luckily for me, I’m married to an eternal optimist who sees life as the glass half full (provided it’s full of either Lafite-Rothschild or Chimay) but I digress. As an admitted Facebook user, the CEO of an online manufacturing marketplace recently posted this status update, “XXXX thinks beginning a marketing email with “in times like these…” or any variation thereof should be banned.” Ha! We couldn’t agree more.

Yet keeping negative sentiment at bay remains challenging. So when we saw this article in the Wall Street Journal describe President Obama’s constant analogies to the Great Depression, we felt a deeper dive into the notion of “fear-mongering” and fear in general may go a little way to explain the state of the metals markets. But first, a look at the fear index or VIX, an index home to the Chicago Board Options Exchange. According to Wikepedia, the VIX can be understood as follows, ” A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatility.” And though the VIX appears high from a historical perspective, when examining this 5 year chart where the VIX has increased by 20% this year alone, the increase happened all on one day, on February 17. And though the news centers on doom and gloom, fear does not appear to be a driving factor.

And though much of the macro news remains less than rosy (I won’t get into the details on home sales which dropped sharply – 8.6% less than the same time period a year ago. But, inventories did hit a two year low and consumer confidence slipped from 35.5 last month to a stunning 25 this month, representing the lowest reading since the index started in 1967, we thought you may like to see some of the more subtle yet positive indicators. These indicators include several pieces of data on the metals industry. In particular: metal prices may be bottoming (we have also discussed this topic in detail) and Canadian stocks may be bottoming. Because half of the Canadian stock market consists of energy and materials stocks, any signal toward bottom there will not go unnoticed. In addition, the gold/silver ratio has fallen below 70. When silver increases faster than gold, we can attribute this as a positive signal because silver moves more based on industrial demand whereas gold tends to move when investors need a safe haven. Finally, Harbor Aluminum also mentions on their website that aluminum may also have hit bottom though we have not formally called that one.

Other non-related metals positive signals according to the Seeking Alpha article include individuals holding all-cash positions (typically a signal of a market at bottom), our trusty VIX looking stable (if not inching lower) and oil close to bottoming. We’ll continue to look for positive signs. In the meantime, keep your chin up!

–Lisa Reisman

Comments (7)

  1. LP says:

    The problem here is that while the VIX is headed down, believe it or not, there is still too much optimism in the markets (not on main street). My biggest fear is that people who predicted this disaster Roubini, Mark Faber, John Mauldin still believe that there is further downside in the market. While the markets are way oversold on both a monthly, Weekly and Daily time frame, it doesn’t mean that we will not see new lows in 6 months.

    John Mauldin calculated a bottom of around 600 – 650ish on the S&P with a remote possibility it may reach 500 (overshooting on the downside). These numbers are based on historical PEs that mark major bear market bottoms of around 13. Due the steep drop in earnings, PEs are around 30 based on a $45 per share earnings on the S&P 500 (current estimates are for around $65 a share). Those are psychologically scary number, but they will help create a solid bottom.

    Robert Shiller developed the cyclically-adjusted price-earnings ratio (CAPE). According to him we still have a little bit more to go. http://www.ritholtz.com/blog/2009/02/shiller-stocks-not-yet-cheap-enough-for-me/

    Also, Shiller thinks housing prices will drop another 10 – 20% percent.

    Mark Faber is too depressing to talk about. Jim Rodgers is clown that is touting the end of the USA to help boost his own private interests.

    However, Roubini who predicted this, thinks that there might be another 1 trillion in losses for the banks before the bottom. What will that do for credit lines? He predicted 1.5 trillion in losses when the talking heads on the street said 300 billion at most.

    Not to mention joblessness will lead to tighter spending habits which will lead to more joblessness.

    Now that’s all the bad stuff. The good thing is that the earth will still stand, the sun will rise and the future will be brighter when we get rid of these excesses.

    So it’s imperative that business think strategically, hedge their commodities, become lean and efficient and get the folks at Metal Miner to help them with their purchases, forecasts and demand management 🙂 This is a great opportunity for business that have cash and can think strategically.

  2. admin says:

    Lloyd, great comments! We did a posting earlier this week on the predictions of Roubini, Faber etc and totally concur with your commentary. And you are probably right…we have a little more to go down before we reach bottom though we are seeing a few early indicators in certain sectors. I feel like we’ve had 7-8 years of rich desserts, too much meat, little exercise and general unhealthy habits. I view this like a diet. It’s time to skinny down, remove excesses etc. And once the free-fall stops, the sun will again shine as you say and we’ll be the better for it! Would you like to guest post for us?? 🙂

  3. LP says:

    Unlike you guys, I’m only familiar with this subject matter from a market perspective. I actually wouldn’t mind guest positing but it would have to be centered around the Futures markets and trends in the economic indicators. If that’s ok with you?

  4. admin says:

    Hi LP, go for it. If you can weave your angle looking at the 3 month aluminum LME great, but if not, don’t worry. Please send your post to my attention. lreisman (at) aptiumglobal (dot) com. We’re looking forward to it!

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