woensdag 15 oktober 2014

Market Outlook

In the past few weeks we have seen a lot of changes in investor sentiment. It all started at the end of September 2014. We had a lot of bad economic news coming. A falling labor participation rate, lower PMI readings, falling consumer sentiment, lower factory orders, declining oil demand, falling home prices, lower GDP growth revisions, declining bond yields, a drop in Dow transportation index, lower Baltic Dry Indices, lower Chinese power consumption growth and more recently falling retail sales.

As a result, the Dow Jones has posted losses for 2014. What's most interesting is that volatility has now started spiking, which is never a good sign for stocks (see chart below from Google Finance). Volatility has seen similar spikes in 2008, 2010 and 2011 which all resulted in a correction in stocks.

On the other hand, gold has been very strong this year based on a higher fear index and higher volatility. Since October 2014 we have seen an additional anomaly where oil goes down and gold goes up. I see this as a buying opportunity in the gold and silver mining sector.

Oil has been declining due to a lower global oil demand (see chart below from Yardeni Research) and due to a higher supply from the shale gas boom in the U.S. and increasing supplies from Saudi Arabia. Though, I expect that at these prices of $80/barrel WTI crude oil, we will see a huge decline in shale gas production going forward. Shale gas producers can't break even at these crude oil prices at $80/barrel.

Especially those shale gas companies with a high debt load will be the hardest hit. For example Continental Resources (CLR), which is a bet on the Bakken shale play, has had a major decline in stock price since the oil price made its dive in October 2014 (see chart below of  Continental Resources CLR).

There are many reasons why markets are correcting now.

Read the analysis here.

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