Historical Trends Suggest Major Stock Market Volatility and Weakness In The Months Ahead. Troy Bombardia is well known for his astute analysis on the stock market and trading based on historical trends. He notes that huge swings in volatility in 2003 resulted in mostly bearish returns for the S&P 500 in the months ahead (See chart and table below). Today we appear to have a similar situation. The market has recently swung from bear market territory of minus 20% below one-year highs to more than 33% of S&P stocks at eight week highs. That to us suggests stock market weakness for the next two to six months amid more high volatility.
Why You Should Be Worried By Today’s Huge Amounts of Stock Market Investor Margin Debt. As you can see from the chart below, margin debt is extraordinarily high, even after the pull back from the recent liquidation. In fact, the sum total of investor negative credit balances are huge, even compared to days of the tech and the housing bubble. That’s very worrisome from a contrarian point of view because high negative credit balances, when investors are at their most optimistic, occur at some point before a major market break. Moreover, the huge level of margin debt also mean any downward moves will be significantly exacerbated by forced margin selling. These most likely occurred in march, when over-extended investors can’t meet broker margin calls. Thus, leaving plenty of margin left to be eliminated until we can to a positive credit balance. Similar to the 2003 and 2008 lows. Strong bull market occur when investors are very frightened. That’s when margin shrinks significantly, and credit balances go from negative to a credit balance
. We don’t see a significant bull market occurring sometime during the next year or two until credit balances return to neutral or positive levels.
Collapsing JP Morgan Stock is Signaling Wall Street’s Worst Fears for the Economy. As the chart below shows, JP Morgan’s share price is about to break through March lows. That means expectations are shares could go substantially lower amid analyst forecasts that earnings may fall 50% in 2020. In fact, many analysts are predicting earnings won’t recover to 2019 levels until 2022 as a result of falling interest rates and a collapsing economy. As the banking industry leader, big trouble for JPM means big trouble for the whole sector and the economy, possibly into 2022.
Why It’s Time to Buy Silver vs Gold. The U.S. government is sinking deeper and deeper into debt at more than $5.5 trillion a year by some estimates. And that doesn’t count the pile on of even more debt from expected future stimulus packages. Interest rates on government bonds have made them very unattractive at 0.5% on the 10-year Treasury bond compared with 1.9% in January and more than 3% in 2018. Meanwhile, the price of gold has been trading at more than $1,700 as an increasing number of investors have decided they don’t want to be a creditor to Uncle Sam, nor risk investing in stocks with the potential ahead for a sustained bear market. On the other hand, investors have been ignoring silver, even at historically low prices of between $15 and $16 per ounce. That makes the ratio of the price of gold to silver to about 113 compared (see chart below) with an historical mean of 40. That difference in our estimation makes silver a good bet for future appreciation as investors increasingly look for undervalued alternative assets with potential for strong future appreciation.
Stock Market Margin Debt is Decreasing But Not Enough to Assure Stocks Won’t Keep DecliningThe good news is margin debt is declining. The bad news is that it still Is much too high to assure a strong bull market, and that stocks won’t decline a lot more. You’ll note in the charts below that positive balances in 2003 and 2008 preceded strong increases in the S&P 500. Why is high margin debt so worrisome? That’s because when stocks with margin positions decline, margin departments at major brokerage firms sell their customers’ stocks when the customers can’t come up with more money to maintain required cash levels. Simply put, margin calls exacerbate stock declines. You’ll note in the charts that high margin debt, or negative balances, tend to precede major corrections, and they can be considered contrarian indicators. That’s because many investors have been deluded by big stock market gains and have thrown caution and rational thinking to the winds.