What is a Sell-Off?
Sell-off is the rapid selling of securities, including stocks, bonds and commodities which lowers the value of any given security. Anytime you have an increase in the supply of a security, whether it’s due to a sell-off or any other cause, you will have a decline in the value of that security. There are many reasons that a sell-off may occur. For example, a disappointing earnings report may trigger a sell-off of a company’s stock. In the oil industry, a surge in the price of oil may lead to a sell-off due to an increased fear that companies will face a drastic increase in energy costs.
Breaking Down Sell-Off
Sell-offs are common place among all financial trading instruments. Due to profit-taking and short-selling they are a common occurrence. For price up trends to be healthy there must exist periodic sell-offs to supply and trigger demand. Minor sell-offs are referred to as “pullbacks,” which tend to hold support at the 50-period moving average. “Pullbacks” are viewed as short-term adjustments. However, when this short-term adjustment continues on a widespread basis, then this may be the sign of a potentially dangerous market reversal.
Corrections tend to be much more aggressive. They generally test the 200-period moving average. A popular sell-off signal, the death cross, is one in which the daily 50-period moving average forms a crossover down through the daily 200-period moving average. At this point there may be some confusion as to the difference between a correction and a bear market. Actually, distinctions between the two are clearly defined.
Corrections and Bear Market Sell-Offs
A bear market can be triggered when the sounds of a sell-off echoes throughout the financial markets for an extended period of time. There have been 25 bear markets experienced in the domestic equity markets since 1929. On the average, a bear market usually experiences a 35% sell-off from the highs and has about a 10 month life span. There are two distinguishing characteristics which define a bear market:
- The sell-off must last for at least two months.
- The sell-off must remain below by 20% from the highs. Anything less is considered a correction.
The markets were dangerously close to a bear market, when at the beginning of 2016 and in the first two months of the year, the Standard and Poor’s 500 (S&P 500) index fell negative 18%. However, it was distinguished as a correction when it rebounded back to break-even price levels, failing to hold negative 20% losses for more than two months.
In the new millennium there have two bear market sell-offs. During the bear market of 2000-2002 the S&P 500 fell 58%. This was during the technology bubble. The housing bubble and global financial meltdown from 2007 to 2009 was the second bear market sell-off. During this period the S&P 500 dropped 57%.
The average bear market occurs every 3.4 years. With markets having been in a bull market for almost double the average figure the question arises, “Is another bear market looming around the corner?”
When investing you must be aware of the trends and averages. The inevitability of a new bear market is almost a certainty. Even if it is not around the corner, the wise investor will have a balanced portfolio to protect his or her investments when the eventuality of bear market occurs. The best protection is to include a gold IRA or some form of a precious metals IRA in one’s investment portfolio.
Unless you’ve been living on an island and are oblivious to current market numbers, you cannot help but notice that today’s stock valuations are extremely high across the board. This bull market run has been in existence for eight years. You also need to take into consideration that the S&P 500 bell weather benchmark trades 15 times its trailing 12 month earnings. This is an incredible statistic. This compares to a longer range average of only 15. In light of this what can the future returns be regarding stocks? In the best scenario you have to assume that returns from this point will be very limited.
However, the market’s famous fear gauge, known as the VIX, offers the real warning sign for investors according to its presently displayed low levels. The Wall Street Journal co-published some revealing data this past with Yardeni Research. The data was offered to demonstrate that the number of bearish investors who still feel that the market will decline is approaching its lowest levels since 1987.
For the entire 27 years it has existed, the VIX showed its historical low at 8.84 this past week. Contrast this with the period of the Global Financial Crisis and collapse in 2008 where the VIX level was at 80. The last time the VIX reached this low was in December of 1993 when the world was prosperous and peaceful under the uneventful presidency of Bill Clinton. The 30 year VIX chart blow shows the history.
Chart Courtesy of Six Figure Investing
Currently there is a collective calm within investors’ minds, which you have to question as to whether it’s justified in today’s current climate. Let’s consider what the world faces – that is – events which threaten the market from every imaginable direction. We have North Korea promising to carry out a nuclear attack on the United States. It appears that all diplomatic measures have been exhausted and a military conflict is inevitable as the United States cannot allow the North Koreans to progress much further. There also exists the reality of high debt levels that are surpassing all-time highs and the entire European banking system requiring enormous bailouts. If this doesn’t alarm you it should. Let’s add one more if this were not enough. In under 90 days the U.S. Federal government, as it once again pushes through another debt ceiling, will exhaust its financial capabilities.
The stock market has been on a tear for nearly a decade. During these eight impressive years of a bull market, though tired and overstretched, investors fear nothing worse than to be adrift in stationary waters in the future. In the history of the S&P 500 this is the second longest winning streak.
The willingness of investors to give their money to junk bond rated companies at only 6% interest is a true sign of the times. These companies represent the lowest quality firms, which most analysts believe will not be in existence in a few years. This type of insanity is becoming prevalent. Let’s take a look at some other examples.
Technological-entertainment giant Netflix is another example of the current widespread desertion of reasonable thinking. Here we have a company that is losing $2 billion each year, yet their stock price is breaching one new high after another. The stock is currently trading at 240 times its earnings. In light of this they were able to issue well-over a billion dollars in new debt at only 3.625% interest. In addition, Amazon stock is trading at 190 times its earnings. This type of continued trend is true insanity.
Is Your Retirement Portfolio Protected by Gold?
What typically happens is that investors become blinded by the rising stock prices and believe that these modern day giants cannot be competed against with these insane P/Es. Yet let’s think about the other moments in history where this was the case. Remember Xerox, Polaroid, Blockbuster and Yahoo!, in addition to many other companies which no longer exist or are a mere shadow of their previous status.
When the markets take a severe downward plunge, which they most certainly will, gold and other precious metals will be strong alternatives for investors. The problem for investors is that if they wait until the plunge actually happens, it will be too late to invest in gold as prices will jump quickly. Gold moves inversely to the stock market in general. When the market is spiraling downward gold moves upward. This is why a gold IRA is such a good asset to have in your investment portfolio. It will protect your wealth during an inevitable stock market bear market or crash.
What are the Experts Doing?
According to Credit Suisse, hedge fund portfolios still contain more financial stocks than what is the usual norm. However, since December of 2016, they’ve reduced their net exposure to banks by about 15%. Furthermore, again according to Credit Suisse, they have increased their gold exposure twofold while selling base metals like copper. In fact, one large category of hedge funds which primarily trades futures, macro CTAs, are currently net short of U.S. equities for the first time since the presidential election.
Furthermore and most notably, this year hedge funds have rid themselves of consumer discretionary companies. The reason is that there is skepticism that any economic recovery will not benefit consumers, therefore putting the onus of revving up growth on the back of Washington, which is notoriously an extremely slow process.
So, if professionals are turning to gold and precious metals then it should be clear to individual investors that they should most likely follow the same path. What do these hedge fund managers know that we do not?
If you’re concerned about the proper way to transfer some of your assets into a gold IRA or precious metals IRA there are many companies that have streamlined the process. Waiting to diversify could prove disastrous.
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