Volatility Predicts Volatility
The S&P 500 is close to all-time highs. VIX is at 17. VIX is a bit elevated. The clue lies in the VIX futures, which are significantly higher. In a typical bull market environment, they should be close to the VIX (in the high teens). In other words, the options market is betting on higher volatility over the next few months.
I’m with them.
This indicator, among others, tells me that when algorithms take the spooz (SP 500 futures) to the all-time highs, instead of celebrating, I should hedge, trim my positions or just get out.
The technicals remind me of 2007, when the market initially sold off due to a problem related to a couple of banks but then recovered and reached all-time highs. Then something hit the fan. This is not the exact map, but history rhymes, doesn’t it?
Meanwhile, there is a value that has been abandoned for a long time. The rare earth metals market has been depressed for three years. This year, however, they became the center of geopolitical arguments. After all, China controls 92% of the rare metals market. Those metals are essential components in MRI machines, cell phones, batteries, satellites, and numerous other industries, including military applications.
The demand is rapidly growing, while geopolitical tensions can disrupt the supply. It is starting to look like a lucrative investment. The chart below of REMX (rare earth metals ETF) shows how out of favor this industry has been. We believe it is overdone on the downside. We are long-term investors in Earth Metals and will hold them as such. The consolidation period over the last few months represents an accumulation opportunity.
The market is defensive and will likely remain so in the foreseeable future. Natural Resource stocks is a place to be for now.
Dennis Leontyev
Dennis@NaturalResouceStocks.net
