Fear rises again on Wall Street
Posted
Sep 03 2009, 12:38 PM
by
Anthony Mirhaydari
Rating:
Since Tuesday's big decline, investors are making a dramatic shift out of more defensive holdings at the expense of riskier assets. Clearly, after an easy summer of steady gains for stocks, investors are once again feeling the cold chill of fear.
For context, the Investors Intelligence sentiment survey recently saw bullishness climb to levels not seen since October 2008. But this is changing now.
Options traders are frantically bidding up the price of protection on the S&P 500 index, causing the CBOE Volatility Index ($VIX.X) to blast 12.1% higher on Tuesday and punch through the downward trend that has been weighing on the measure of investors apprehension since the beginning of the year. We're seen similar breakout moves in gold and bonds over the past few days as well.
The action in gold prices, as represented by the Gold Trust Shares (GLD), was notable. Prices moved out of a six-month declining price wedge that reflected the increased confidence and rising risk appetite that allowed stocks to rise out of the March low.
Of course, worries about the future are not the only reason people allocate capital to gold. It is famously used as an inflation hedge as well. It could be argued that some of the increase in gold reflects increased confidence about the strength of the global economy. Given the massive amounts of monetary and fiscal stimulus, as well as the huge debt burden carried by Western governments, the long-term outlook certainly looks inflationary.
There's really no sign of inflation yet, mind you, on any of the long-term measures that I employ. So that's not the primary driver of the current upward shot for gold. Deflationary pressures abound as prices continue to fall. Prices in Europe fell for the third straight month in August. Credit Suisse reports that retail food costs fell in the United States for the fourth consecutive month thanks to big declines in milk and egg prices. Wage growth remains stagnant. Microsoft cut the price of the Xbox by $100.
Indeed, long-term Treasury bonds continue to rally -- something that wouldn't happen if inflation was on the horizon. The iShares 20+ Year Treasury Bond Fund (TLT) jumped 1.5% on Wednesday, moving over triple-top resistance. The fact that three of the most conservative asset classes are finding eager buyers corroborates the rising risk aversion story we're being told by falls in pro-cyclical financial and commodity sectors. The overall impression is one of battening down the hatches.
My positions
To take advantage of these trends, I've added a number of positions to my portfolio at Wall Street Survivor. These include a position in the ProShares Ultra Gold ETF (UGL), which returns twice the movement of gold prices, as well as the iShares Barclays 20+ Year Treasury Bond Fund. I've also added a position in the aggressive Direxion Small Cap Bear 3x Shares (TZA) to get negative exposure to the high-beta Russell 2000 small-cap index. If risk appetites are waning, than small-cap stocks will be punished much more than large-cap holdings.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
Related reading:
Bank stocks lose leadership role
The end of the new commodities bubble
Which is right: Bullish stocks or bearish bonds?
Stocks form dreaded 'Gravestone Doji'
