Jonathan Krinsky and Mike McGlone on Peak Volatility, Gold and Record Stimulus

Tue, Mar 31, 2020 - 11:11am

The market volatility we’ve had in the past few weeks hasn’t been seen since the 2008 financial crisis and it’s hit all investment classes from stocks and bonds, even commodities. On last weekend's edition of the Financial Sense Newshour, Jim Puplava spoke to Johnathan Krinsky and Mike McGlone to get their take on volatility, gold, and what to expect going forward.

See The Mother of All Stimulus Bombs; Plus, Jonathan Krinsky Says Stocks Haven't Bottomed Yet for audio.

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Jonathan Krinsky of Bay Crest Partners talked to Jim about the strength of FAANG stocks, how to identify a market bottom and gold.

You wrote the S&P 500 needs to start outperforming in large caps—that it can’t have its cake and eat it too. Can you explain what you mean?

What we were referring to was large cap technology/growth. And for that as a proxy, we've been using the NASDAQ 100. That's the 100 very large cap, high growth and predominantly tech focused names, so we're looking at that index. And we all know that that's been a great relative outperformer over the last any number of years, really.

But within that, there are always periods where you see that underperform the broad market or the S&P 500 and leading into January and February when everything topped, the NASDAQ was already outperforming. What we’ve seen since then is that outperformance accelerates even throughout the correction.

If we look at a ratio or relative strength of the NASDAQ to the S&P 500 in the correction, the NASDAQ has continued to surge relative to the S&P 500 and that is very unusual and rare. And in fact, if we go back over 40 years of history that we have for the NASDAQ 100, we've never really seen a meaningful pullback, where the NASDAQ has outperformed like that.

That tells us we’re probably not out of the woods yet. In the last couple of days, we’ve started to begin to see the NASDAQ relinquish some of that relative strength to the S&P 500 over the bounce we've had. Regardless whether we put in a final low or not, we think the NASDAQ's probably going to show some relative underperformance for a couple weeks or even a couple months. But more likely, we're going to see some sort of retest over the next couple of weeks or months in the overall averages. And that's when we think you'll finally see some more meaningful underperformance in some of the large cap tech and growth names.

Let’s talk about some of the FAANG stocks and why many of them could become vulnerable.

I think they've been a safe haven trade. To some extent, they're liquid, they're big and they're obviously not going away if we have a severe recession, but I think at this point, that’s some of the risk. Again, it doesn't mean they have to go down a lot on an absolute basis, but I think they're probably going to underperform a bit, they could go down on an absolute basis.

If you take Apple, it's just now sitting on its 200-day moving average down about 30 plus percent off the highs. Typically, in bearish markets like we saw at the end of 2018, Apple got quite a bit below its 200-day moving average.

So, could this be the bottom? You know it always could be. But I think as we look historically in deep bear markets, you’re probably not done until you see some real capitulation in some of the large cap leadership stocks.

What would you be looking at to tell you this is a bottom?

The low, so far in this pullback or bear market, on March 23 was actually not the heaviest volume. I think that's certainly interesting. One of the things along these lines with the large cap tech issue, is if we look at something like the Dow Jones Market Neutral Momentum Index. This index looks to replicate a strategy of going long high momentum stocks and short low momentum stocks.

In bear markets that tends to outperform because obviously it has a short component to it. What we found looking back historically, is you need that index to start underperforming the S&P 500 by quite a bit before we put in a meaningful low, and we can look at something on that ratio. When that weekly ratio crosses back above its 20-week moving average, that tends to be a pretty good signal. We're quite a bit away from that.

I think you could make the case that we've seen the peak in volatility, and the closest analogy would be 2008, when we saw the peak of volatility in October of 2008, but then the bear market obviously didn't conclude until March 2009. So that's certainly a scenario here where we've seen some sort of capitulation and certainly the fear, as judged by the volatility has peaked, but then we need to go back and retest. And you'll see a lot of bullish divergences there. So, you never really know, I think there's a lot of constructive action happening in the last couple days, we'll have to see how the market reacts once you start hitting more meaningful levels of resistance, probably looking more like 2700 on the S&P, and how it acts once we get up there.

Unemployment claims jumped over 3 million—something I haven’t seen in my 40-year career—let's talk about that.

Yeah, it's pretty remarkable. As market analysts, specifically technical analysts, we're always more concerned with the market's reaction or the stock's reaction to the news than in the news itself. I think so far, the action tells you that, yes, it was a shocking number, but I don't think anybody was surprised by it, given what's been going on.

That's certainly a good example of looking at the market's reaction, not necessarily what the number is, but what the market does and that’s a shame. But then below the surface, what is really standing out to us is that again, the NASDAQ 100 is massively underperforming, actually, the ratio of the NASDAQ 100 of the S&P 500 was a second worst day in the last decade. We’re starting to see that happen on the on the upside with those typical large cap FAANG stocks. Yes, they're going up, but they're lagging quite a bit. And again, that’s not surprising given the massive performance we had not only coming into the peak of the market, but throughout the bulk of the correction.

With the government issuing a 2 trillion-dollar stimulus plan, what are your thoughts on gold?

Gold was reacting very well at the start of the year; it was acting like a risk on asset. It held up pretty well until early March, when there was just complete liquidation across all asset classes. But it's snapped back very well. It's consolidating in that 1600 to 1650 range, but I think the key point here is that it's done that despite of or in the face of an extremely strong U.S. dollar. If you were to look at gold and almost any other global currency, it's even more impressive.

If we were to go back to the 2008 financial playbook, we saw gold get liquidated throughout the worst part of the bear market. And then once people realized that there was going to be pretty big quantitative easing and the dollar started to weaken, that's when gold really started to perform very well and obviously we know that started to move up to its all time record high in 2011.

I think we're starting to see the dollar price some of that in and I think it was up 11 straight days and then it's been down the last couple days. So, I think continued weakness in the dollar will only benefit the gold trade.

If we're looking at price only it's done what it's expected to do. It had the pullback in mid-March, kind of chopped around its 200-day moving average around 1500 and then snapped back nicely above 1600. We think still think it's set up to challenge its all-time highs, possibly push up toward $2,000 an ounce. Whether that's in a few months or later this year remains to be seen, but we're still fairly constructive on gold.


Jim Puplava spoke to Mike McGlone of Bloomberg Markets about 2 trillion-dollar stimulus, a divergence in gold and the VIX.

The debt to GDP ratio could push gold higher. How does the 2 trillion-dollar stimulus bill play into this?

The Federal Reserve has absolutely flooded the system with money and debt to GDP currently is running around 108%. The last time it really accelerated was when we did the same thing in 2008, it was about 60% or so then. The significance is it went straight up and stabilized just over 1% where we are now, and it never went down despite this pretty significant economic bull run we've had. I see 1900 and gold surpassing that level, it's just a matter of time.

If history is a guide, it's probably going to happen much faster than it did in the rally after the 2008 crisis, partly because this is global. We're seeing more monetary and fiscal stimulus on a global scale than I think ever— unprecedented is probably the proper term. We've seen the stock market volatility recover; it's recovering from a lower base than it did in 2007. If you look at the VIX Volatility Index, it reached the lowest for longest ever, and then we just did that 2018 so it's coming back up. Then of course, we see what's happening with most other currencies. Gold has already made new highs in terms of the euro, the British pound, the Indian rupee and the Canadian loonie. It's just a matter of time before it does that in the dollar.

Normally when you see the dollar strengthening, gold moves in the reverse direction. That isn’t happening now, can you speak to this divergence?

According to the Federal Reserve, the broad measure of the dollar is up about 9% of the year, and gold is up about the same amount and that is very rare today. When the Dow is up that much gold will decline. One thing to remember about gold is that it's one of the most stable assets in history measured over time.

It only really fluctuates in terms of that paper currency. It's measured in, for instance, one acre of farmland in Iowa was worth about six ounces of gold for the last 30 years. It's that currency that matters. We've seen dollar strength but measured versus other currencies when they're all going down, there's only one stabilized measure and that's obviously property or physical assets. Then, the most liquid global measure is gold. So that's the way I see it, it’s just appreciating in terms of that paper currency. The supply that paper currency is kicked into substantial increases, which favors that physical solid asset, gold.

On January 22, the VIX was at 12 and in about six weeks it was up at 8586. We haven’t seen volatility like this, across all asset classes, since 2008.

I'm glad you mentioned the VIX, because to me, that's been my key parameter and I had the same signal back in 2007. It was early but one thing I learned being an options trader in Chicago is that volatility always means reverting and that's what it's doing now. The last time we had a spike like what we had recently was in 2008. And that was a good indication that the markets going to continue to go down.

I like to look at the VIX on a 50- or 100-week average. On a 50-week average, the VIX is running around $18, it spiked at 42 and it reached 42 in 2008 and I fully expect it to get there. The reason is because it made an all-time low at the end of 2018. And that's what threw me for a loop because 2019 made an all-time new high and as you just mentioned, a month ago the stock market was at all time new highs. To me that was the dead cat bounce very similar to 1929. Very similar to 2000. You have maximum greed and unsustainable prices when people expected a new high plateau. All we're doing is mean reverting.

Now, the VIX was a good indication, and that's where I come over to the stock market and deflation. We've had deflationary trends in commodities since the 2008 crisis, i.e. crude oil and it peaked around 145 and just last week it bottomed at 20. That's a pretty much a 90% correction. Virtually every commodity has had major issues, but therenate just no signs of demand coal in the world and there's massive supply. So there are no issues with the deflationary market. The stock market got a little bit too expensive and typically, when you have corrections like this, they usually last a while. It'd be lucky if we get a V bottom. That was the problem to me with 2018. That Christmas Eve low of 2018 was just was a V bottom that went straight up. We're basically right at that low right now in the S&P 500. And to me, that was a bit of an indication that this was just to excessive. It looks to me like we have a period, based on history, of subdued and underperforming stock markets.

Click here to listen to the full interviews with Jonathan Krinksy and Mike McGlone or for an archive of past shows, visit our Financial Sense Newshour page.

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