foxex: Bounce-back!

Insight after the bell

By Caleb Silver, Editor in Chief

Tuesday's top stories:

3 - Chart of the day- Gold regains some luster

#1 Bounce-back!
Today reminded me of Martin Scorcese's magnificent Oscar winning film, Raging Bull. Jake La Motta, played by Robert DeNiro, has just gone 15 bloody rounds with Sugar Ray Robinson in one of their epic battles that typified prize-fighting in the 1940's. A bloody La Motta, who lost this particular fight, staggers over to Sugar Ray, his nose crushed against his skull, and says through a sneering smile, "You never got me down, Ray.. You never got me down."

image: IMDB

Investors may feel a bit like LaMotta today, watching the major U.S. markets plunge over 2 percent at the open, and then staging a miraculous comeback to only end the day down half a percent for both the S&P 500 and the Dow and a little less for the Nasdaq. That said, we should not be celebrating the comeback, but rather thinking about the long-term damage we may be suffering while taking real stock of what's happening around us.

This is not a proclamation of a pending stock market collapse. Nor is it an emergency announcement telling you to sell all your stocks. You need to allocate your investments according to your needs, always! But, we can't deny what we are seeing in U.S. and global equity markets. The rotation is taking shape and the wave is gathering force day by day, week by week. We don't know how big it will be or what will remain in its aftermath, but the signs are becoming clearer that the future will be challenging for investors. The animal spirits are awake.

Here's how we ended up:
DJIA: - 0.5%
S&P500: - 0.55%
Nasdaq: - 0.42%
Vix: + 7.63%

Why it Matters: Our own Anxiety Index was fire engine red today, as readers plowed through our site in search of terms like short selling and Black Swan. When search volume rises for fear-based terms like those, we know what comes next. The VIX (Volatility Index) spikes and money moves out of stocks, fast. But, where is it going?

Normally, we'd look to bonds at a time like this. Rising yields, however, have been crushing bond prices, especially for corporate bonds. Add trade concerns to that mix, and they look a lot less safe right now. Bond investors may be throwing in the towel after a long ride down. As interest rates have been on the rise, U.S. Government bonds have been a bit of a refuge, but 10-year yields topping 3 percent, falling bond prices and a bond-selling (as opposed to bond-buying) Federal Reserve, are knocking the bloom off that rose too.

According to TrimTabs, bond mutual funds and ETFs shed $23.6 billion in October as of last Friday, October 19th. If this pattern persists, it will be the first outflow from bond funds since December 2016 and the largest since December 2015 when $24.1 billion flowed out.

Corporate bonds have born the brunt of the selling as corporate bond ETFs have lost 3.7 percent of assets or $5.8 billion as of last Friday. Small dollar amounts, but a huge data point. Netflix announced a $2 billion bond issue yesterday, but they may be one of the few companies that can get away with it since they have made themselves indispensable in our living and bedrooms.

Super short term US Treasuries, like the 3-month bill, are yielding 2.34 percent - the highest level since 2008 (Gulp!) and have gotten a lot of attention as investors look for a safe place to park their cash through the storm.

Believe it or not, retail money market funds are one of few asset classes experiencing net inflows. Money markets were dead money until a few months ago, but today they look like an island of serenity in a tumultuous sea.

As of October 17th assets of retail money market funds increased by $6.08 billion to $1.08 trillion. Among retail funds, government money market fund assets increased by $4.83 billion to $645.64 billion, prime money market fund assets increased by $190 million to $310.91 billion, and tax-exempt fund assets increased by $1.07 billion to $126.09 billion, according to the Investment Company Institute.

We are not suggesting a mass migration of investors into money market funds, but when it is one the few areas of the market experiencing inflows, we have to take note.

What's Next: More volatility. Count on it. The ingredients are all there: Rising interest rates, a stampede from growth to value and dividend stocks, a potential trade war with China, and a midterm election that will likely impede the Trump agenda and potentially create at least two more years of gridlock in Washington similar to Obama's last term in office. These are all being boiled into a gumbo of volatility and uncertainty. As an investor, you need to decide whether your time horizon and asset allocation are aligned for these turbulent times.

P.S. The volatility in U.S. markets looks like a cake-walk compared to major markets around the world, except for Brazil. Brazil has been in rally mode for the past two weeks as Jair Bolsonaro, the conservative candidate for president, moves closer to a victory.

Outside of that country, it's been a sea of pain for global investors. Pension Partners Charlie Bilello aggregated the data of country ETFs and the percentage loss against their all-time highs, and it's not pretty.

#2 Pot stock fizzles on NYSE debut
You know sentiment is rough out there when the pot stock of the moment gets swatted out of the sky on its debut at the New York Stock Exchange. Aurora Cannabis, one of the few high-flying cannabis companies out of Edmonton, Alberta debuted as a NYSE-listed stock today in what many marijuana investors thought would be a harbinger of high times for the sector. It didn't work out that way as it fell more than 11 percent.

Why it Matters: Aurora is already a public company, listed on the Canadian Exchanges, with a track record and potential interest from Coca-Cola and others, so it says. It's still losing money, around $19 million Canadian, for the first 3 quarters of 2018, but who isn't in that sector? Still, Aurora, and the entire cannabis sector has fallen out of favor with investors just as legalization in Canada gets underway. Timing is everything for mania stocks like Aurora, and today may not have been the day to make a grand entrance.

What's Next: There's been talk about frothy valuations for pot stocks and no substantial numbers to back those up. The truth also is that pot stocks saw a parabolic rise over the past few months and the recent events may be a simple case of profit-booking by investors. But then again, that's what they said about crypto last year. The difference is that unlike crypto coins, these companies have tangible products and financial statements to show for them. Pot stocks may have tumbled from a high but its not the end of the story just yet. Having said that, don't rush into an investment without fully understanding the business.
Read More:
Plunging Marijuana Stocks May Have Further to Fall
Medical Cannabis Stocks Vs. Recreational Cannabis Stocks: Which Ones Should You Invest In?

Chart of the Day: Gold regains some luster
Fluctuations in the price of gold are driven by a slew of different factors. Three of the primary factors are: interest rates, the value of the U.S. dollar, and the level of fear and volatility in the markets.

Here's how the relationships between gold and these factors generally tend to work: 1) When interest rates are rising, gold prices will often fall because gold is non-interest bearing. If investors can get higher yield elsewhere, the demand for gold diminishes. 2) Since gold is most often denominated in U.S. dollars, gold and the dollar are inversely correlated. As a result, when the dollar rises in value, gold prices tend to fall, and vice versa. 3) Gold is considered a 'safe-haven' asset – in times of market turbulence, investors tend to flock towards the perceived safety of gold. On the other hand, when markets are booming, gold tends to lose its safe-haven value.

The chart of gold prices below shows some of these dynamics in play. A sharp and sustained fall has occurred for much of this year, starting in April. At the same time, interest rates, bond yields, and the U.S. dollar have all been surging, and the demand for safety has diminished due to a high-flying stock market. All of these conditions helped place heavy pressure on the price of gold.

Things have changed in the past couple of weeks, though, as the equity markets have pulled back sharply, while bond yields and the dollar have appeared to stall. This has helped trigger a substantial rebound for gold that has pushed the precious metal up from the sub-$1200 level to approach key resistance around $1240. With any further market turbulence and/or pullback in interest rates and the dollar, a gold breakout above $1240 could signal an extended rebound and recovery for the precious metal.