There are two interesting features about extremes in the financial markets. First is how extreme they can become, and second, how the wildest extremes are perceived to be completely normal by most investors.
Everyone loves “a bargain,” but in the financial markets the fact is that everyone hates a bargain. In reality, very few end up buying low and selling high. When a given asset class is dramatically out of favor, it finds very few buyers. A small number of savvy traders, corporate insiders, and a few wealthy experienced investors, will tend to be the major buyers whenever a multi-year bottom is being formed.
Where are the bargains now? We think commodities, particularly in raw materials and precious metals. We have finally begun to experience the signs of continued tentative strength for the ETFs of commodity producers as they begin to recover slowly from an irrationally oversold condition.
Always keep in mind that momentum players are out there looking for the next big run. Those assets which have already experienced their bull markets may have been momentum favorites in recent months, but as these have mostly completed their gains, many of these traders are looking for new flavors. If commodities become the new flavors then the price of these “bargains” will explode upward.
The resolution of the all-time disparity between high-yielding assets (todays “darlings”) and commodity shares will be decisively resolved during the next several months. This will send the former plummeting to important lows, while the latter will soar higher.
This resolution will be fast-tracked by momentum players, and will end with flock traders once again buying high and selling low. Once we reach that stage, they will be buying the shares of raw material and precious metals at very high prices and selling their past favorites at loss.
It’s important to note that VIX (Volatility Index) has come down near its lowest point in more than six years. Basically this is a sign that a true bear market is still likely but several months away from beginning. VIX will first form a long pattern of higher lows before the stock market suffers its next plunge. So tread carefully when it comes to buying the recent big winners. Multi-year equity bull markets have many common features, but one of the least appreciated ones is the tendency for commodity assets to perform strongly during the final year of the bull market.