Are you seasick yet?
I ask because just since the start of the year, we’ve seen an amazing string of triple-digit moves in the Dow Jones Industrial Average.
A quick recap: We tanked 331 points on Jan. 5, then another 130 points the next day. Then the day after that, on Jan. 7, we surged 213 points, followed by 323 on the 8th.
Then on Tuesday, we swung from up almost 300 points to down more than 100 points — before finally closing off about 27. And on Wednesday, we tanked another 300+ points in the early going, before rallying back to down 187.
If this surging volatility doesn’t have you reaching for the Dramamine, I don’t know what will!
So what the heck is going on … and what does it mean for the future? I think it goes back to what I wrote on Tuesday afternoon. We have seen huge, huge moves in many asset classes.
The U.S. dollar has soared, while the Japanese yen and euro have plunged. Crude oil has imploded by more than 60 percent in just seven months, while copper just plunged to its lowest since 2009.
|Since the start of the year, we have seen mega-moves in many asset classes.|
Yields on benchmark government notes in Japan and Europe have actually gone negative. That, in turn, has helped drag the yield on the U.S. 30–year Treasury bond back down to the record lows (2.43 percent) it hit at the depths of the Great Recession back in late 2008, and again in mid–2012.
These are large, mega-moves. And as a result of these mega-moves, sentiment is at massive extremes in virtually every one of these markets.
Think of a bunch of people in a lifeboat, all leaning over the rails on one side. That makes the boat incredibly unstable. It takes hardly anything at all to tip the thing over entirely, or for people to realize they’re leaning too far — and all of a sudden run to the other side en masse!
In market terms, we’ve clearly entered a period of heightened volatility … and that equals heightened risk. Because of that, and because of the extreme sentiment out there in many corners of the capital market, I’m doing a few things:
Taking big profits where I have them in case we get large trend reversals. For instance, in Safe Money Report I just told subscribers to bag 33 percent in nine months on an investment that rises in value when the euro falls.
Holding hedges against vulnerable sectors with downside risk that have not yet fallen or have only started to. Think financials.
Bottom-fishing in sectors that have already collapsed, and that offer extremely compelling risk-reward ratios. Think energy.
That’s a blueprint that makes sense to me right now. Then we have to wait and see if this period of rising volatility turns into something worse — an era of sharper market declines! Should it look like we’re headed in that direction, much more drastic measures will be called for!
Until next time,