12 Aug 12th August 2024
Weekly Index Movement
| S&P500 | -0.0% |
| Nasdaq | +0.4% |
| Aussie All Ords | -2.2% |
Last week was one for the record books. The week started with a mini Black Monday crash where the S&P500 opened over 4% lower. This was the largest down move since 2022.
It all started because the Bank of Japan raised rates by 0.25%. That sent the USDJPY down 7% and then their stock market fell over 12%. This shows how correlated all asset classes are and why old portfolio theory of stocks and bonds together doesn’t really work anymore.
Other markets around the world fell in unison, because, well, just because if one falls they all fall.
And falls are buying signals.
As you probably know, we trade a lot of options here at Capital 19 and I am going to let you in on a secret that is one of the best ways I know to pick a buy point for stocks.
The VIX index is calculated by comparing the prices of Put options to Call options on the S&P500 over the next 30 days or so. When it is high it means traders are expecting the market to drop over the next 30 days and vice versa when low.
The advantage of this indicator is that it is forward looking. It is predicting. It is not looking at the past to try and predict the future, but rather looking at option prices in the future to predict the future. As such it is a much better indicator than anything you will find inside technical analysis and charts. (I suspect I’ll get a lot of comments telling me I am wrong here, but I am sticking to my guns on this one).
The long term average of the VIX is 19.5 and the standard deviation is about 8.
That means that a 27 VIX is a statistical anomaly. And a 35 VIX is even rarer.
I use it in this way – if I see a 27 VIX then I start buying and buy even more when it gets to 35.
Last Monday, when Japan was falling faster than the popularity of breakdancing at the Olympics, the VIX hit 65. That is just plain ridiculous and the biggest buy signal I have seen for several years.
To put a 65 VIX in context, the only other times it has been as high as 65 was during the GFC and during COVID when they locked us up. A 65 VIX is saying a 0.25% rise by the Bank of Japan is just as significant as those two events. Which it clearly isn’t and meant the sellers have it very wrong. Mind you, sellers are nearly always wrong so that bit isn’t unusual.
The next day the Bank of Japan came out and said something along the lines of, we won’t surprise the market with any more rate rises because stocks got too upset when we did. That sent Japanese stocks up 10% in a day, pretty much reversing all the damage done.
And because markets just copy each other these days, US stocks rallied and put in a biggest up day since November 2022.
We ended the week pretty much where we started.
Recession. What Recession?
It really is laughable listening to journalists or so called Newsletter experts. Two weeks ago stocks were putting in a good July and these pundits were saying how brilliant the Fed is to manage a soft landing.
Once day of selling and suddenly everything is all – we are heading into recession.
Don’t they know that a recession is 2 quarters of negative growth? Last quarter growth was +2.8% and the forecast for this quarter is +2.5%.
The Fed has told us to expect cuts in September which is designed to take their foot off the brake and let even more growth happen
And why should an economy that is adding jobs at a good clip each month suddenly begin producing losses in the near future?
Quite what a catalyst could be to start this eludes me.
What about Iran attacking Israel, I hear you shout. Well, yes, admittedly, if this happens stocks will fall in dramatic fashion. But what is the chance of this? I don’t know and suspect there are only a handful of people working in senior roles inside intelligence agencies that might have an idea. And I don’t think any of them write a newsletter that they advertise on Facebook.
Oil is down at $74 which tells me the oil market thinks there is no chance of a Iran conflict. I’d rather listen to that signal than the picture of the guy trading stocks from his hammock on Facebook.
In summary – there will be no recession. Not for some time anyway and last week was a brilliant buy point. If you didn’t buy then you might get one more chance here. Remember that a VIX of 35 is unusual and a buy point. Turns out, it is rare to see just one print in the VIX above 35 in month. It is as if once 35 is breached we get aftershocks that send it back there again.
Get your buying button ready though, as if we do get lucky and see another 35 VIX, that will probably be the last before things get back to normal with confirmed rate cuts being the catalyst to send stocks to new highs by the end of the year.
You Can Now Buy Greek Stocks
The name Capital 19 comes from the fact we have access to 19 different countries. That is no longer true as you now have access to Greek Stocks on the Athens exchange. But we won’t be changing our name to Capital 20.
Don’t know what Greek stocks to buy? How about Helleniq Energy (ELPE) that operates in the Energy Sector. Main activities are marketing and refining of oil products but they also provide engineering services.
It is trading on a PE of 4.3 with cashflow per share of 2.82 and a dividend yield in excess of 14%.
Opportunity in Ukraine
If you think I have lost the plot by refusing to accept the US is about to plunge into Recession, or for watching an index based on options to indicate when to buy stocks……this idea might get you hitting the unsubscribe button. But hear me out…..
The war in the Ukraine has been rolling along for 2 years and 5 months now. It won’t go on forever. One day it will resolve, likely with a ceasefire and some kind of agreement. Either Russia takes over Ukraine or the present frontline becomes the new border between Ukraine and Russia.
Obviously Ukrainian companies have been decimated and it will be no surprise to hear how far down their stocks have fallen.
Enter MHP SE (MHPC) in your platform. It trades on the Warsaw exchange.
MHP is one of the biggest landholders/agriculture producers in Ukraine. It does a lot of Grain and Chickens.
The market cap is just $385million and it holds 360,000 hectares of land. At this market cap, it is valuing that land at about $445 per acre. Agricultural land in the US is valued at around $15,000 per acre.
The company currently trades on a PE of just 3.5
Look what has been happening recently to the stock price. Something is building.
Buying companies in the Ukraine? Crazy right? or maybe after 2.5 years of war all the bad news is factored in and the recent rally in the stock price is telling us a peace deal is close at hand.
The way I look at this is – one for the bottom drawer. You can buy it stupidly cheap now. The most it can go down is 100%, but the upside potential when peace is reached is many multiples of this. You might need to be patient with it, hence the bottom drawer. But there are interesting ideas out there when you go looking……
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.