With the gold market soaring and major turmoil in currency markets on the heels of the stunning news out of Switzerland, today one of the great minds in the business sent King World News a timely piece that contains the wisdom of Jim Rogers and Benjamin Graham.
January 15 (King World News) – When asked how he made all his money, Jim Rogers answered, "I sell euphoria and buy panic." The way he determines that is to wait until prices are "gapping" in the charts. Gapping on the upside is considered "euphoria," while gapping on the downside is representative of "panic." Currently, crude oil is "gapping" on the downside and Treasuries are gapping on the upside. The result has left stocks gapping on the downside as well. The implication, even though I continue to believe stocks are in a secular bull market, is that corrections in bull markets can be painful. Recall, since the March 2009 low, we have experienced a number of 10%+ corrections in the S&P 500 (SPX/2011.27) with the worst being a near 20% affair.
However, what is happening now should have come as no surprise to readers of these comments for in late December 2014 we repeatedly counseled to raise some cash because the "timing models" that served us so well last year were telegraphing a rough patch in the first few months of the new year. Yet, in my opinion, it is too late to panic. The time to raise cash was a month ago, not now. Now it is time to make your "shopping list," looking for the opportunity to selectively redeploy that cash into preferred equities. Granted various stocks will make their lows at different times, so pick your spots carefully. Tactically, at least on a very short-term trading basis, many of my indicators are becoming oversold and it would not surprise me to see another bounce attempt off of some kind of low on Thursday. Unfortunately, I do not think any rally attempt "sticks" and we will subsequently go lower.
However, on a longer-term basis, listen to what Benjamin Graham has to say in the book titled The Intelligent Investor. "The intelligent investor realizes that stocks become more risky, not less, as their prices rise – and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand), you should welcome a bear market since it puts stocks back on sale." Graham goes on to note, "The value of any investment is, and always must be, a function of the price you pay for it."
He concludes by saying, "We have often referred to this type of strategy as 'buying the flops';" except in this case he is not referring to the card game "Texas Hold 'em," but as legendary investor Jim Rogers puts it – buy panic and sell euphoria. As I write this Wednesday night, the Swiss National Bank scraps its ceiling for the franc sending the euro crashing, and Chinese loan data is weak, which likely pressures our equity markets again on Thursday. Look for some kind of trading low, but I do not trust it.
King World News: If the gold market has ended the cyclical bear phase inside of its secular bull maket, moves to the upisde could become quite violent. Today we are seeing one such example of this as the gold bears have pushed gold lower in the face of massive physical buying out of the East and incredibly bullish gold fundamentals. Bottom line: It's a bad day for the gold bears.
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