Wednesday, November 30, 2011
"We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful." --Warren Buffett
Top corporate insiders have excellent track records in buying and selling. They have been aggressively adding to their equity holdings during the past four months near all important lows. Usually, such buying tends to subside with each subsequent low as insiders progressively exhaust their spare cash, but last week we had another intense round of purchases by insiders and an equally dramatic decrease in their selling. This is especially significant since absolute valuations today are higher than they were at most of the previous bottoms since early August 2011, as measured by the S&P 500 and other general equity indices.
Another bullish sign for stocks has been the behavior of VIX, a gauge of investors' fear which had peaked at 48.00 at the close on August 8, 2011 and has since formed a pattern of numerous lower highs. This is exactly how VIX acted in late 2008 and early 2009, as well as at previous important equity-buying opportunities. Eventually, VIX will return to the mid-teens which has repeatedly served as a sell signal; for example, VIX had bottomed at 14.27 on April 28, 2011 which was an excellent time to get out of the stock market.
Meanwhile, U.S. Treasuries remain incredibly popular. If you look at TLT, a popular exchange-traded fund of U.S. Treasuries averaging 28 years to maturity, it reached a level last week which nearly matched its all-time peak from the previous bear market. In other words, Treasuries are behaving as though we were already in a severe recession. This means that either Treasury investors know something the rest of us don't know, or else something else is going on. It is far more likely that investors who have fled equities out of fear of a continued bear market remember how well Treasuries had behaved in 2008, and have therefore crowded into this safe-haven asset in anticipation of continued gains. However, whenever everyone is jumping aboard the same bandwagon, there is sure to be disappointment regardless of the fundamentals. If the global economy continues to muddle through, even without much improvement from current levels, the anticipation of a sharp contraction will prove to be unfounded, and TLT could slump all the way back to 100 or even lower. Those who read this web site frequently know that I repeatedly advocated buying TLT near all lows from December 2010 through April 2011, but it has become far too popular to be worthwhile at the present time.
Emotionally, it is always most difficult to buy stocks when almost no one else is willing to recommend doing likewise. The shares of commodity producers and related industries in particular, including exchange-traded funds such as SLX, SEA, GDXJ, KOL, and XME, as well as European-bourse funds like EWG and EWI, remain unusually depressed and could gain more than 20% once investors realize that the apocalypse is not just around the corner. For the purpose of full disclosure, I own SLX, SEA, URA, GDXJ, and EWG, in order from the largest to the smallest allocation.
Posted by TrueContrarian at 8:11 AM