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Now is Not the Time to Get Comfortable. The Recent Run in Stocks Might Be Deceiving.

By Lina Martinez

Starting on February 11th, markets went on a run that have brought them back to the levels they were before the dramatic drops that started at the end of December. It’s been a good run and one that has made some cash for traders that were picking up stocks at the bottom. For those that hold stocks long term, it could be troubling.

The last two days have seen a bit of a lull with just small increases. The VIX, which measures volatility, has dropped significantly, from $28.14 in January to $13.79 today. That is a large drop for the VIX in a very short period. As a measurement, the VIX isn’t that great as it tends to only measure volatility when stocks are dropping and assumes an increase in prices is a reduction in volatility. It isn’t.

Last week saw a lot of forward movement around the fact that the Fed did not raise rates, as zenruption had predicted earlier. The Fed move might keep money cheap but it is kept cheap for a reason. Wage growth and inflation continue to be fairly soft but do show some signs of improvement. The U.S. consumer is still cautious and economic troubles internationally spell a wary Fed.

So now we are back to being overvalued with headwinds still in front of us. While China has been fairly quiet the last month, there are still massive structural issues in their debt markets. Growth is falling in China to its lowest level in 25 years to an expectation by the international Monetary Fund of 6.3% this year. While still an amazing growth rate by any accounts, debt in China has leveraged up to expect much higher levels of growth. A rapid decrease in growth, even when still very positive, can upset the entire fragile balance of the overleveraged debt markets.

Drops in commodities, in part due to declining growth in China, have threatened growth prospects in other countries that were heavily dependent on that single source of growth. Russia has been affected more by the decline in oil prices than any of the economic sanctions imposed against it by the West.

In the U.S., the drop in oil prices has decimated the fracking industry and the companies that made money from supporting it. With defaults happening nearly daily to fracking exposed companies and massive debt exposure with the banks, things don’t look good. It is no wonder that once resilient North Dakota has officially slid into recession.

One big tell of things to come has been the run up of gold and silver prices since the start of the year. While the SPDR gold fund rose to $121 on Wednesday it did back off to finish the week. Overall, gold and silver have been the biggest winners of the year. zenruption expects this trend to continue in favor of price appreciation of precious metals as a safe haven.

Bond prices are yet to reflect the run up in stocks over the last month. Yields are still relatively low, which seems to indicate some unease of future economic conditions. Rates on bonds continue to resist the upward pressure that runs counter to the market as there is a continuing move into the safety of bonds by investors in the know.

Some of this might sounds convoluted and Greek to many but the message is essentially that warning signs exist. The zenruption staff feels that markets will be correcting back down very soon. While bonds have gone up somewhat in prices, they will be falling again and now is a good time to move into them.

The VIX may say that volatility has decreased but the VIX is deceiving. We are still seeing volatility; it has just been to the up side recently. Seeing the VIX at $18 or higher within the next 45 days is extremely likely.

Our continuing position is that the weak of heart avoid equity markets and covet bonds. The 401ks of our readers are best positioned in high quality, low risk funds and high quality bond funds at this time.

 

Lina Martinez is a zenruption contributor and has her degree in political science. We think she has the wrong degree as she is a financial genius. She is currently researching all stocks associated with vices as a way to determine economic trends.

 

Feature photo courtesy of Flickr, under Creative Commons Attribution-Noncommercial license