With current market conditions, some experienced investors know they should be heavily invested, but they can’t bring themselves to jump in until everyone else has already done so.
We feel there will be a short term rally for a few months and an opportunity to make a 20% gain on equities. However, it may not be smooth and we may have to tolerate a short, very adverse period, as the financial markets are presently testing the most intelligent traders.
Here’s what we foresee.
Average investors are preparing themselves for a repeat of November 2008. They are content to sell their stocks especially in retirement accounts. They feel that the next move will be an additional decline of 20% and they are not concerned about missing on a rally.
But from our perspective, it’s highly possible that equities will rally strongly for two to three months starting in September.
- A high rate of Insiders buying during the recent two weeks.
- We have had one of the biggest total outflows from equity funds by average investors.
- VIX (The Volatility Index) reached 40 a few times last week.
After a couple of months of rising prices, the previous intense fear will transform itself into a pronounced complacency, with VIX moving from above 40 to below 20.
Once the average investors are sure that the worst has passed, we should at that time expect another 20-25% plunge.
No one has a crystal ball – including us – but the signs are definitely bullish at the moment. This means that for now, we are buyers of risk assets (equities), and sellers of safe haven assets such as Treasuries,
On another note, just a word of caution: there is a bubble forming for Gold and Silver; also for currencies such as the Swiss Franc and the Yen.