Is This Just the Beginning?

"Volatility" is an overused word in the investment world. Despite its overuse overall, it's fair to say January has brought a bracing shot of volatility. The month ends tomorrow. Will things calm down after that, or is this just the beginning of a grinding stretch of volatility?

Don't be surprised if it is. It's been building for months now, with various and sundry divergences in stock indices, as we've noted many times. These continue. And now we see them expressed in price action that, as always, surprised the bulls. 

Our roster of trusted investment analysts with whom we've consulted for years have noted the same divergences. They have also expressed frustration over how the stock market - and markets in general - have behaved over at least the last year. The Fed, in its unholy alliance with government policy, seems to have managed to so distort things as to make long-standing methods of discerning "what's happening" not quite useless, but sometimes rather muddy. However, we have to press on in the face of it all.

This week, we made some notes, based on the comments of a few of our analysts. We'll share them with you today, for what it's worth.

Analyst #1

* -    NASDAQ and Russell below 65-week MA – Bear Market – Overall Stock Market continues forming bottom that will lead to a full Bear Market in months ahead – PTI slips below 89-day MA (a rare thing) as it did 2016, 2018, 2019 (but fairly quickly rose above); watch to see if it holds below.
* -    Interest Rates: Can continue higher. 10-year could rise to 2%, even 3% and remain historically low. Hold on to all Bond positions, as Bonds are bottoming.
* -    USD had breakout, could keep rising putting pressure on Currencies, PMs.
* -    But Gold remains in C Rise – Hold PM positions
* -    Some resources rise, others fall. FCX Buy below 37.

Analyst #2

* -    Bear Market has begun – based on charts, not “20%” decline which D doesn’t use.
* -    Started with various Sectors, will spread now to others
* -    Sentiment has turned from bullish to uncertainty – will move to concern, then worry, then fear – portfolios may go down 50% or more.
* -    Corrections are not like this – It’s a Bear Market
* -    9-month distribution from smart money to inexperienced traders is significant and suggests Bear Market may also be significant.
* -    Most investors don’t sell at a loss – That’s a mistake – Loss is a good reason to sell
* -    Long distribution also in Russell and other sectors – Long distribution means bear market will be long and deep
* -    Thinks it will be a record-setting Bear Market – will be a tumultuous year for stocks
* -    NB: Most investors don’t understand diff bet “tight” money and expensive money. If Fed raises rates, that’s expensive money, but not tight money. Tight money is what precipitates credit crisis/recession.
* -    Inflation now at levels comparable to 1980-82, as forecast
* -    NB: Bond yields at 100-year low with inflation at 40-year high – a divergence that cannot last
* -    Rates will rise substantially which will cause bonds to decline, eventually much lower stock prices.
* -    If Bond yields just go to “average” since 1870, bond prices will plunge – a blood bath among banks and institutional pension funds. But if D prediction that inflation will rise to 105-year highs, bonds will be massacred.
* -    Shorting a potential Bond Bear Market may present great opportunity for at least several years (depending on politics) just as there was a great opportunity in 1980-82 at beginning of Bond Bull.
* -    Recommend: Short TLT or Buy TBF
* -    Inflation – produced by the Fed – can be a wealth enhancer for intelligent people who know how to use it for their benefit – the opposite for those who don’t
* -    Normally, you expect short rates to be at level of inflation, not 0.05%

Bits and pieces, to be sure. But add them up and it does seem a Bear Market in stocks has taken hold. The comments about bonds will cause us to re-evaluate our current risk management approach to our bond allocations, if not to look to put on an outright long-term short position. 

As for those who are "intelligent" enough to use inflation for their benefit, it's an exclusive club. We're not in it. The only way we know to benefit is to try to adjust our asset mix such that we're at least somewhat protected from inflation. But such protection won't insulate us from having to face the rising prices we pay for the necessities of life.

We'll see what comes our way in February. It begins on Tuesday.