"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, May 15, 2014

Risk Aversion sends Global Equity Markets lower, Bonds higher

One never knows what the markets are going to focus on any given day ( which is the reason this never gets boring) but today seemed to be one of those days in which investors/traders were given to experiencing a sudden case of "risk aversion".

News out of the Eurozone set the mood with Euro-area growth up a mere 0.2% for Q1 when market expectations had been for a 0.4% increase. While hardly the stuff of legend at 0.4%, at least the estimate was up slightly. When the actual number came out and investors realized that the Eurozone was barely avoiding an overall contraction, equity bulls got nervous. Heck, it seemed as the entire world was suddenly itching to get out of stocks and into bonds.

Ever since China news has been less than stellar there have been concerns about a slowdown in global growth.

Even here in the US, players seemed to hone in on the Industrial Production number, which was down as they overlooked a friendly Initial Jobless Claims number.

The lousy Euro-area number increases the pressure on the ECB to "do something" at their next meeting in June. Already talk is ramping up of their own version of QE to stave off deflation. Keep in mind that in the past the ECB has surprised the markets by announcing an interest rate reduction apart from their actual meeting. It could happen again if we get any further unexpectedly weak numbers out of that region.

No matter the reason, most global equity markets were weaker today. Bonds, on the other hand, here in the US, were higher with interest rates falling below the 2.5% level at one point on the Ten Year Treasury. There remain an awful lot of speculative shorts in the bond markets and it appears that they are getting squeezed in a big way right now. When that many bets are all on one side of a market, it does not take much to get the ball rolling in the opposite direction. These things tend to feed on themselves as short covering begets more short covering until all that is left is the strongest of hands.

To illustrate why I believe we currently have a risk off trade occurring in the markets, take a look at a rather simplistic, but helpful, comparison chart I use to gauge investor demand for risk. It is essentially comparing the Russell 2000 index to the S&P 500 index.

The Russell 2000 is comprised of small cap stocks and by its nature, tends to be much more sensitive to sentiment in regards to risk than its bigger cousin, the S&P 500. This can be seen in the chart.

Notice how the two indices can practically be laid directly over the top of the other and the pattern is almost identical. Both tended to rise and fall in harmony beginning at the date shown on this chart all the way up until this month.

Can you see how recently, the Russell 2000 has been underperforming its larger cousin in a very big way? Look at the February low for the Russell 2000 and you can see that the index actually fell to that level today before it rebounded. Compare that to the S&P 500 which remains well off its February low.

If we take the high point of the Russell 2000 back in March of this year which was up near 1212 ( the best close was near 1208) and compare that to its current level, near 1096, the index has fallen some 9.3% from its best CLOSING LEVEL. The S&P 500 on the other hand closed today near 1867, down 25 points from its best CLOSING LEVEL near 1892. That is off a mere 1.3%. Another way of saying this is that the Russell 2000 is very close to achieving an official "correction". That requires a drop of 10% off the best close.

The lesson? Investors appear to be nervous right now and seem to be fearing SLOWDOWN fears at the moment. This is one of the causes of the big rush into bonds. We are apparently back to caution as the name of the game. I think many are wanting to see confirmation of an improving economy here in the US, especially in the employment area, before getting too aggressive on the buy side in stocks again.

Along this line, the VIX or volatility index rose today. It still remains quite tame however.

There is also a bit of chatter out there that holders of European-based bonds are jettisoning them in favor of US Treasuries. That talk has picked up as sentiment increases that the ECB is going to act on the stimulus front next month. If they do, and if the Euro weakens as a result, some of those bond holders would prefer to own US Treasuries as they expect the Dollar to strengthen against the Euro. We'll see about that but it is a plausible theory.

One last thing, I do not currently have the time to do this, but some of you more enterprising readers out there might be able to do some research to see if you can track money flows INTO TREASURY ONLY FUNDS. It would help to confirm that we are seeing a shift out of stocks temporarily into the safety of bonds. Demand for bonds is very strong right now. I continue to marvel how the Fed has been able to reduce their bond buying and not upset the interest rate market. First they get a geopolitical event to induce safe haven buying into bonds and now they get some fears over slowing global growth. Boy howdy are these guys good! Their reduced buying has been more than offset by investor demand.

Keep in mind that the nature of today's markets is that all it will take to completely turn this sentiment around is a piece or two of solid economic news. Again, I want to caution you traders out there, do not overtrade right now and watch your position size closely. You can have your trading career end very quickly if you become foolish right now.


  1. Prediction: within a week we'll see a reversal of flows from "risk-aversion" assets (whatever definition of them is on a given day) into "risk" assets, which will last for less then a week, and then turn back to those "risk-aversion" assets (definition of risk and risk-aversion is a living thing). This will go on forever until we're all broke and they have it all.

  2. https://www.youtube.com/watch?v=iHqcKa7dg0A

    For you Silver fans I put some comments in under bobbychristopher.

    Enjoy the vid.

  3. Seems like the "Risk On" and "Risk Off" cycles keep getting shorter and shorter.

    But despite that, two trends remain firm:

    Bond ETF's like TLT and MUB have been on a relentless climb with hardly any volatility.

    GLD and GDX have been in a horrific downturn for nearly 3 years, with brief and insane volatility spikes.

    Any wonder why institutional investors are jettisoning anything gold related and piling into U.S. Treasuries instead?

    One's career could be at stake if you are managing funds for institutional investors.

  4. Mr. Norcini, thanks again for a wonderful read.
    I have been following your blog since shortly after you started it and always enjoy your unbiased way of exlpaining the market madness! Your writings have been a wonderful resource to my research and fascination of the markets, especially the metals!
    I've wanted to comment here on your blog for some time but because of lack of time and problems with google and apple and computers etc. I haven't been able to.
    I was the one hoping you would become bullish on the metals (from signals from the markets) and suggesting that you weren't on KWN because you weren't bullish enough. Sorry if I struck a nerve there as I know you have said you were good friends with Eric. When I was hoping you were bullish on the metals I certainly didn't want a world with hyperinflation and chaos, but only to even come close to breaking even! As I have lost imensly, mostly my own fault but also fraud! -fraudulent storage fees etc. (long story)
    I have noticed a lot of your frequent readers have been jeering and bashing KWN and the guests on KWN and I wanted to say a few things. Maybe its marking a bottom sentiment reading???
    - I have to agree that some of KWN headlines are misleading and thats a negative for me but KWN is a media site and well thats the media for ya.
    -I have learned a great deal from the guests on KWN and enjoy learning from some of the veterans and miss the weekend specials with Dan Norcini!
    -some guests have been recommending buying silver since it was @$4 and 5 per Oz.
    and if you do the math, even here at the 19 to 20 level you still have a great return.
    Also some have cautioned not to go "all in" as is the tendency of a lot of us!
    -many guests have said 10 to 15% of ones savings,
    Also I think many traders on here confuse the time frames and cercumstances of individuals. Many readers and listeners are not traders or day traders or even have anything to invest!

    I wonder how many readers here own metals but its only paper so they can sell it with the flick of a mouse!

    back to your blog, I was wondering how much faith do you put in all these gov't numbers and stats that are published? On a scale of 1 to 10, 10 being most faith what number would you give? Also I have been noticing a lot huge company buyouts and takeovers, could this be the sign of a equity market top?
    Also I think many are too bullish at the top and too bearish at the bottom of a market, which could be the case with all the bears here on this site :)



    1. derry;

      I do not doubt for one minute that the government's numbers are more often than not, doctored. The problem is that the rest of the big market participants trade off of those numbers. As a trader, you either accept the reality of what we have to deal with and position yourself accordingly, or you lose money. It is that simple. Arguing with the market that the numbers are no good, while the bulk of big money is busy trading off of those numbers, is an exercise in foolishness. Believe it or not there are many or do that anyway. Their trading or investing accounts are the proof that this is not a sane policy.

      You mentioned some on Kwn have advised buying silver when it was $ 4 or $5. How many of them told their followers to sell it out when the charts broke down? Answer - none of them. They kept saying that it was time to load the boat again at $35, then $30, then $25 etc... that is the problem over there - those guys, who are held up as some sort of market gurus, investing geniuses extraordinaire, keep singing from the same hymn book and have been doing that for three years. Meanwhile those who were prudent enough to listen to what the market was saying sold some of their metal holdings and made some nice profits that they were able to put to work elsewhere making even more profits. That after all is the goal in this business. Making money - not arguing with the market or parroting the same perma bullish stuff year after year. At some point people will learn to ignore these Johnnie one notes and listen to the only voice that matters - the market's voice.

      There are too many gloom and doomers over there at KWN. I was not apparently bullish enough on the metals to continue being welcomed there. I actually think it is tragic at what has happened to that site. It has no credibility left because it is the same "collapse is imminent any day now" stuff over and over again. I stopped reading it a long time ago and frankly could care less what is posted there anymore.

      Fear and sensationalism sell, they always do and thus there will always be an audience for that sort of thing. I believe successful trading/investing means checking one's own bias or views at the door. That is a skill set that in all my years of trading is the most rarest of all commodities.

    2. Hi Dan. I totally agree and great advise about checking your bias at the door!
      I have been trying to learn to listen to the market but its hard to know.
      I am self taught and usually hear the market when it tells me, "that was a grreat move but ......you missed it again!"
      I also make a couple of good trades, but only to lose it on the next!

      I find a lot on KWN etc. rant and rave about how corrupt and broken the system is but never seem to offer a solution!

      Do you have any thoughts on the announcement of the ending of the silver fix? Do you think the gold fix will end too?
      I know you had recently but could you do some more charting work on silver maybe after this next couple of days trading?
      It looks like we may be at a critical junksher hitting a long term trend line!

      all the best,


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