Understanding Headlines Can Lead to 'Golden' Opportunities

The following chart, which details the changing risk appetites of professional money managers over the past two decades, has been getting a lot of press time lately. Almost every media outlet is flogging the headline that the people running money were incredibly risk-averse as of Monday. They noted that pessimism was lower that day than it was during October 2008, just after the Lehman bankruptcy sent stocks reeling. I added three reference dates to the original graphic to highlight two other negatively perceived times (mid-February 2016 and March 23, 2020). I also added the ultra-bullish feelings those same money managers were feeling on Nov. 9, 2021. Knowing that intense risk-aversion is in vogue is one thing. Knowing what that meant for investors, though, is a whole different animal. Most people would expect widespread pessimism to be a bad harbinger for future stock market action. In fact, the exact opposite is true. What happened following October 2008, Feb. 15, 2016, and March 23, 2020? The final low in the 2008-2009 crisis came less than five months later. It started one of the best bull markets in history. Feb. 15, 2016 marked the bottom of what was then the worst start to a calendar year in history for the S&P 500. Stocks took off the next day and by year end showed a solid gain for the full year. March 23, 2020 marked the exact nadir in the Covid-panic. Despite horrible news that lasted a very long time, buying during the panic ended up being one of the best moments in history to buy/hold/add to positions. Most major indexes bottomed out this year on or near June 21. The full month of June, even after a minor rebound, was one of the very worst percentage declines in history. No wonder asset managers were feeling so blue and unexcited about layering on risk. Anyone who knew what happened the prior three times, though, should have been feeling wildly bullish. Monday started out hot, before being torpedoed late in the day by some Apple -specific news, which triggered computer-based, broad sell programs. By closing time a few hundred point gain in the Dow Jones industrial average had morphed into a greater than 200-point loss. All the media talk about extreme pessimism only added to the hot mess that afternoon. Fast forward to Tuesday morning, however, and the futures were quite positive. Shortly after one afternoon, all three major indexes were way up. An hour later they were even higher. Monday's late reversal was a gift for those wanting to buy cheap. Today's large upturn feels terrific, but makes everything you hadn't purchased yet much more expensive to acquire. Waiting for the crowd to confirm is useless, unless you love paying more than necessary when buying shares. Based on that, you would have jumped in early in the day on Monday and been afraid to buy more just hours later when prices were lower. Huge pessimism from professionals and the public alike, as we saw this week, is always a sign that risk is low and upside potential is wide. Here is another interesting thought to ponder for today: Over the past 12 months the price of gold has been in a somewhat narrow range. Gold spiked by about 27% around the start of the Ukraine conflict. It then dipped back to about negative 7% over the trailing year as of last weekend. The notable thing in the chart below is not gold's price action. It was the incredibly levered movements in gold mining shares and closed-end funds vs. the commodity price. Profits of miners swing wildly as the all-in cost to produce is relatively stable. Higher gold pricing leads to much better EPS. Lower gold quotes can lower earnings or even cause losses for higher-cost producers. While physical gold lost 7% over the past year and about 19% from its winter peak gold miners' shares plunged from up 27% to minus 29% since around March. The huge selloff in mining shares makes for a great entry point for those wishing to trade gold. Extreme volatility allows for quick upturns following gold price declines. The chart below shows the movements of the gold exchange-traded fund vs. Newmont Mining , SSRM Mining and the closed-end fund ASA Gold and Precious Metals Ltd. . I recommended SSRM last September at $14.38 per share. It peaked last winter at $24.58, a nice 70.9% rise plus a bit of dividend income. It might be time to play it again now at around $16.50. Another great way to play fluctuations in gold's value is through ASA. The closed end fund topped out at $23.79. ASA actually made an intra-day low of $13.04 last Friday. Monday's share price of $13.36 represented a 13.19% discount to the fund's Monday liquidation value of $15.39. That was a nice bonus on shares that had already dropped back by 38.88% year-to-date. The nature of ASA's moves can be seen in Monday's net asset value, or NAV, and price action. A 30 cent gain in net asset value only translated to a 7 cent move up due to the last afternoon market selloff. Inefficient trading like that will work to your favor later on as, rising gold prices cause NAV to soar and the discount to narrow or disappear. Simply returning to its old 52-week high would deliver a solid 78% gain from Monday's closing quote. What ties my two thoughts together regarding the broad market and gold? It's always best to buy when things are out-of-favor and cheap rather than popular and expensive. Act accordingly.

Understanding Headlines Can Lead to 'Golden' Opportunities

It's always best to buy when things are out-of-favor and cheap, rather than popular and expensive, as I'll show here using gold.

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