Chart 1: Overbought and oversold global macro asset classes
- Equity indices continue to dominate the overbought technical levels. In particular, United States and Japanese equities have performed well as central banks in these two countries have done the most monetization (both countries are extremely indebted). Mexican equities, on the other hand, have been falling rather rapidly in recent weeks, which could signal that the overvaluation in this region is about to enter a corrective mode. Commodities also continue to remain out of favour with investors, who do not see inflation as a threat nor expect interest rates to rise anytime soon. As expressed in the weekend post and in the recent SSOL newsletter issue 5, commodity sentiment remains extremely depressed. Finally, precious metals and foreign currencies are the most oversold assets globally. Interestingly, the poster boy of Asian boom and global risk taking - the Australian Dollar - has seen its technical RSI level fall below 30 this week.
- Recent vertical rise in the S&P has made the US equities best performing major asset class for the investment cycle. Equity returns since the beginning of 2009 have now exceeded 100% including dividends, with returns even higher for those who both the March 2009 lows. During the initial stages of the recovery cycle, Emerging Market equities held the leadership role, which was eventually passed to Gold in the later parts of 2011. Corporate bonds continue to outperform government bonds in a nice and progressive manner, with less volatility. However, it is also worth noting that since the beginning of 2007, long dated government bonds have outperformed every other asset class, apart from Gold (chart here). In my opinion, this makes the bond market extremely unattractive as a long term investment.
- The recent talk of precious metals manipulation is complete non sense, in my opinion. Large number of investors cannot understand why Gold is falling while central banks continue to devalue currencies and monetize debt. My answer is quite simple: Gold has to correct before it can resume its bull market. They were too many bulls expecting Gold to go parabolic. Looking at the chart above, Gold has not experienced a 20% annualised correction since the beginning of its secular bull market. This is extremely rare and very unusual according to my own historical research of market price action.
- Let us consider the fact that during the panic of 2008, global equities, commodities and corporate bonds sold of pretty hard. Gold ended up finishing positive for the year. During the initial recovery phase in 2009, government bonds also experienced a strong sell off. This was followed by a 2011 bear market in world equities ex-USA (chart here). Commodities were also hit very hard too, apart from Gold. It refused to correct by even 20%. However, eventually the asset did break down below the $1,530 per ounce. I believe this to be a healthy correction for the bull market to resume. Therefore, Golds correction shouldn't be "why puzzle" nor a "manipulation blame". The asset was overdue for a correction and will most likely keep correcting for a few more weeks, months or even quarters. The quicker any asset with strong fundamentals can shake weak heads and over-leveraged players, the quicker the rally can resume.
- Finally, it should be noted with very high caution, that US equities remain the only major asset class not experience a bear market or an annualised negative performance during the current investment cycle. This too is also very rare. As a matter of fact, the last time US equities posted even a -1% annualised total return was back in middle of 2009, almost five years ago. This asset class now presents most risk to long term investors. My advice is for one not to chase rising markets, instead one should invest in oversold assets with improving fundamentals.
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