Best of the Week
Most Popular
1. The Trump Stock Market Trap May Be Triggered - Barry_M_Ferguson
2.Why are Central Banks Buying Gold and Dumping Dollars? - Richard_Mills
3.US China War - Thucydides Trap and gold - Richard_Mills
4.Gold Price Trend Forcast to End September 2019 - Nadeem_Walayat
5.Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - Anika_Walayat
6.US Dollar Breakdown Begins, Gold Price to Bolt Higher - Jim_Willie_CB
7.INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - Nadeem_Walayat
8.Will Google AI Kill Us? Man vs Machine Intelligence - N_Walayat
9.US Prepares for Currency War with China - Richard_Mills
10.Gold Price Epochal Breakout Will Not Be Negated by a Correction - Clive Maund
Last 7 days
The State of the Financial Union - 18th Aug 19
The Nuts and Bolts: Yield Inversion Says Recession is Coming But it May take 24 months - 18th Aug 19
Markets August 19 Turn Date is Tomorrow – Are You Ready? - 18th Aug 19
JOHNSON AND JOHNSON - JNJ for Life Extension Pharma Stocks Investing - 17th Aug 19
Negative Bond Market Yields Tell A Story Of Shifting Economic Stock Market Leadership - 17th Aug 19
Is Stock Market About to Crash? Three Charts That Suggest It’s Possible - 17th Aug 19
It’s Time For Colombia To Dump The Peso - 17th Aug 19
Gold & Silver Stand Strong amid Stock Volatility & Falling Rates - 16th Aug 19
Gold Mining Stocks Q2’19 Fundamentals - 16th Aug 19
Silver, Transports, and Dow Jones Index At Targets – What Direct Next? - 16th Aug 19
When the US Bond Market Bubble Blows Up! - 16th Aug 19
Dark days are closing in on Apple - 16th Aug 19
Precious Metals Gone Wild! Reaching Initial Targets – Now What’s Next - 16th Aug 19
US Government Is Beholden To The Fed; And Vice-Versa - 15th Aug 19
GBP vs USD Forex Pair Swings Into Focus Amid Brexit Chaos - 15th Aug 19
US Negative Interest Rates Go Mainstream - With Some Glaring Omissions - 15th Aug 19
US Stock Market Could Fall 12% to 25% - 15th Aug 19
A Level Exam Results School Live Reaction Shock 2019! - 15th Aug 19
It's Time to Get Serious about Silver - 15th Aug 19
The EagleFX Beginners Guide – Financial Markets - 15th Aug 19
Central Banks Move To Keep The Global Markets Party Rolling – Part III - 14th Aug 19
You Have to Buy Bonds Even When Interest Rates Are Low - 14th Aug 19
Gold Near Term Risk is Increasing - 14th Aug 19
Installment Loans vs Personal Bank Loans - 14th Aug 19
ROCHE - RHHBY Life Extension Pharma Stocks Investing - 14th Aug 19
Gold Bulls Must Love the Hong Kong Protests - 14th Aug 19
Gold, Markets and Invasive Species - 14th Aug 19
Cannabis Stocks With Millennial Appeal - 14th Aug 19
August 19 (Crazy Ivan) Stock Market Event Only A Few Days Away - 13th Aug 19
This is the real move in gold and silver… it’s going to be multiyear - 13th Aug 19
Global Central Banks Kick Can Down The Road Again - 13th Aug 19
US Dollar Finally the Achillles Heel - 13th Aug 19
Financial Success Formula Failure - 13th Aug 19
How to Test Your Car Alternator with a Multimeter - 13th Aug 19
London Under Attack! Victoria Embankment Gardens Statues and Monuments - 13th Aug 19
More Stock Market Weakness Ahead - 12th Aug 19
Global Central Banks Move To Keep The Party Rolling Onward - 12th Aug 19
All Eyes On Copper - 12th Aug 19
History of Yield Curve Inversions and Gold - 12th Aug 19
Precious Metals Soar on Falling Yields, Currency Turmoil - 12th Aug 19
Why GraphQL? The Benefits Explained - 12th Aug 19
Is the Stock Market Making a V-shaped Recovery? - 11th Aug 19
Precious Metals and Stocks VIX Are About To Pull A “Crazy Ivan” - 11th Aug 19
Social Media Civil War - 11th Aug 19
Gold and the Bond Yield Continuum - 11th Aug 19
Traders: Which Markets Should You Trade? - 11th Aug 19
US Corporate Debt Is at Risk of a Flash Crash - 10th Aug 19
EURODOLLAR futures above 2016 highs: FED to cut over 100 bps quickly - 10th Aug 19
Market’s flight-to-safety: Should You Buy Stocks Now? - 10th Aug 19
The Cold, Hard Math Tells Netflix Stock Could Crash 70% - 10th Aug 19
Our Custom Index Charts Suggest Stock Markets Are In For A Wild Ride - 9th Aug 19
Bitcoin Price Triggers Ahead - 9th Aug 19
Walmart Is Coming for Amazon - 9th Aug 19

Market Oracle FREE Newsletter

Top AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

Stock Markets at Major Bear Tipping Point: Protect Your Wealth

Stock-Markets / Stocks Bear Market Feb 02, 2009 - 03:04 AM GMT

By: Armstrong_Davis


Diamond Rated - Best Financial Markets Analysis Article2008 and 2009: Years of return OF capital, not necessarily return ON capital. We are close to a major turning point in the stock market and during the weekend I considered very carefully what action to take.

Clients may recall that there is a greater than 90% correlation between all major stock markets. So, whether this is the FTSE in London, or the DAX in Frankfurt or the Nikkei in Tokyo, the movement in stock prices has been almost identical. For us, the S&P is the leader of world markets. Hence we focus on it rather than, for example, our own FTSE100. Look at the following chart of the S&P 500.

This is a chart for the last 6 months ended Friday 30 January. White candles are days that end higher than the previous day closing value. Blue candles are the opposite. Thin lines indicate the market moved to that value very quickly but retracted just as promptly.

Note how the stockmarket plummeted from September 19 to October10. Then it hung around for over a month and fell – for just 24 hours – on November 20. Since then, it has appeared to ‘want to' drag itself higher. This is not surprising for the following reasons:

•  The market fell c 45% from October 2007 to October 2008 and a bounce increases its likelihood after such a fall. ( I said in mid-October this could be an interesting place to start going back in on a medium-term view.)

•  Warren Buffet was buying stocks publicly

•  Commodity stocks have risen c 50% since the October lows, giving a help to the wider market

•  Banks have been bailed out globally and are rapidly increasing their margins

•  Central Banks have slashed their rates however the commercial banks have not passed on every cut to borrowers

•  Banks have reduced their risks in lending

•  Deposit rates have been slashed

•  From a chart point of view, the market has dallied with the mid-October low many times since then but has not broken the level (except the one apparently false break in November). Please note, as far as we are concerned, the market does have a collective memory, whether it's due to average valuations, sentiment or whatever. Thus, we talk of the market ‘dallying' and ‘wanting to do something'. It cannot be a coincidence that the market has stopped so often at that one point on the chart during each retreat.

I have been short term bullish, as many know. I have, for some while now, thought that the market, in general, could rise 30-50% from the October lows. That would have taken the FTSE from c 3800 to c 5250 at least. See FTSE chart last 6 months

Indeed, I have reiterated this to clients as recently as the week before last.


There are ominous signs that this last time the market approached the psychological support (last week) it could now break lower.

The economy of the world is in recession. US GDP numbers last week were again truly awful.

As you see, the S&P closed on Friday – the last market-open day of the month and of the week – at a value (825) which is lower than the lowest point of Friday 10 October, which was 839.

The psychological line lies at 818.

Also, we have seen some very large US companies' share prices recently decimated. Examples include Caterpillar, International Paper and Textron. These are huge non-financial companies.

It does appear to me that the stockmarket may go to the November 20 lows, which is c 10% down from where it closed on Friday (The FTSE would probably go to 3500, which is 16% down from the Friday close). If it does, that may not be the end of the world, as it were. The world and his dog will be screaming ‘End of the World is Nigh'. It will be all over the papers and the broadcast media.

It could be another frightener like November 20, and it could sharply rise back again as it did then.

If it does go there and break that low, well look out below.

So, that's the general market. Within the market there are numerous sectors of the economy, such as financials (banks and insurers, for example), energy (e.g. oil and gas), commodities (e.g. gold miners and agricultural producers).

Let's look closely at one of those sectors, one very close to our heart as having the potential for significant growth over the next few years.


A complicated set of charts at first sight but not so complicated after a little consideration.

The red chart is the index of gold and silver stocks in the US, called the XAU Philadelphia Gold and Silver Index. You see how hard they were hit in the second half of 2008 and how they have bounced sharply from an index level of c 65 to c 125 at the end of last month – a doubling over around three months – most encouraging. As I say, back to September / early October levels already.

The gold chart is exactly that – the price of gold bullion, in US $. Note how it has grown manyfold since the ‘absolute' lows in 2001. Even though it, like everything else last year, was choppy, in fact gold was higher in $ at the end of 2008 than when it started. As far as we can tell, this was the only asset class to be up on the year, except cash. In Sterling, gold was up a simply sterling (sic!) c 45%.

Now look at the middle, stocks to gold ratio, chart. Note how the stocks compared to the bullion remained within the band of 0.175 to 0.3 for many years (1997 to H1 2008 barring very minor and temporary movements outside). As gold has surged during these years, so have the stocks.

Until H2 2008. The stocks were decimated while gold fell but not hugely.

We believe what this tells us is this:

•  Gold and silver stocks have been hit much harder than the underlying commodities

•  They are undervalued now

•  They will rise back to the 0.175 to 0.3 ratio band.

•  To do so, even if gold stopped rising – and we believe it's, remember, ‘going to the moon!' - stocks would need to rise a further 30% just to get back to the lowest point in the 11 year range.

This appears consistent across the commodities' space. This is one of the many reasons why we recommend commodities and gold stocks in particular.

Finally, let me tell you how Armstrong Davis' clients' portfolios are established.

The bulk of client funds (around 70%, depending on the client) are held with ‘active asset allocating' fund managers such as Miton Special Situations [click to view the most recent report] which is one of our ascribed ‘Moderate Volatility' funds). In active asset allocating funds, the fund managers move between asset classes, such as stocks, cash, bonds, commercial property, gold etc according to their views of investment and economic conditions.

Every client portfolio is a bespoke portfolio with a mixture of active asset allocating funds (Low Volatility and Moderate Volatility) and strategic asset allocation funds in commodities (commodities in general, gold and agricultural stocks – High Volatility).

In strategic asset allocated funds, the investment is in the stated area(s) eg. gold stocks. Thus, the managers, in this example, moves between gold stocks. Thus, the proportion that clients invest in these areas merely alters according to their moving valuations.

Around 30% of client holdings are in commodity stocks, according to the client's investment risk profile. In other words, if clients can accept a higher downside in a calendar year and they seek greater returns in the medium to longer terms, we recommend allocating more to commodity funds. These were hit hard during the big wider market falls of the 3 rd and 4 th quarters last year. After the October lows, they rose sharply and, in general, we're back to early October levels i.e. before the bulk of falls took place. They have risen perhaps 50% from the October lows – a much greater rise than the stockmarket in general.

So, our clients' portfolios are to a greater or lesser degree correlated with the wider stock market.

What to do

Market Movement A:

If the stockmarket tests the November lows then jumps sharply back up this could take the market up some 30% as a starter. This could happen within weeks or a couple of months.

Market Movement B:

If the market tests the November lows and goes straight through then it's ‘Goodbye Vienna'. The market will likely collapse again and fall a further perhaps 50%!

Our current thinking is that Market Movement A is more likely. For B to take place there would need to be a number of issues coming together such as President Obama's stimulus package does not get through the Senate, Oil goes to $20 (taking the oil stocks down with it), the volume number of transactions in the market (sales) would have to double at the November low compared to the volume of transactions that we had last week.

All of these happening together is not likely.

In other words, as investing is about probabilities – there are no certainties nor guarantees – there is a higher probability, in our view, that if the market goes down to the November 20 lows, they will come right back up again.

On that basis, we recommend you sit tight.

If we are wrong and the market goes down to the November lows and blasts right through them then we suggest you sell much of your funds and hold in cash until it would be safer to go back into the market.

We invite clients to refer friends and family to us so that we may review their arrangements and ensure they are secure.

We invite solicitors and accountants to refer clients to us, similarly.

We invite enquiries directly.

Investors must secure their capital and ensure it retains purchasing power.

At Armstrong Davis we are serious about preserving capital, first and foremost.

We merge our expertise of markets and macroeconomics with financial planning tools to provide excellent financial advice to high net worth families and business people and trustees.

Please remember, investments can fall as well as rise – and they will.

As ever, if you have any queries – and I‘m sure you have many – please do not hesitate to contact me.

Jonathan Davis BA MBA FCII AIFP FPFS ,
Chartered Financial Planner

Managing Director

Please remember investments can fall as well as rise. And they will! - Armstrong Davis Ltd accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

© 2009 Copyright Jonathan Davis - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules