When U.S. Stocks are Expensive, and Volatile

The big run higher in stocks since the election has stalled, and professional traders are taking that seriously.

In fact, the big run in the major indices since Nov. 8 has created a situation where U.S. stocks have become overvalued. At least, that’s the latest take by more than four out of five professional traders.

According to the latest monthly Bank of America Merrill Lynch fund manager report survey, 83% of respondents say domestic stocks are too expensive.

That’s a record number for this metric since the survey began in 1999.

But just how expensive are stocks right now? Well, the S&P 500 trades at about 17.5X expected earnings over the next 12 months. That’s the highest level since 2002.

Now, considering the smart money is just that — smart — it’s no surprise that many of these market pros are shifting allocations. They are moving their money to areas of the market that offer more-attractive valuations.

According to CNBC:

… portfolio managers are moving overseas, with allocations to emerging markets hitting a five-year high and Europe seeing the most in 15 months. U.S. levels are at their lowest since January 2008.

This rotation is interesting, especially considering the heightened geopolitical tumult over the past several weeks … not only in hot spots like Syria, North Korea and Afghanistan, but also in Europe.

The European Union is officially undergoing "Brexit." And no matter how smooth the transition is, it’s likely to create some political and economic dislocation.

Then there’s the French presidential election. This is creating even more uncertainty over a potential "Brexit-like" win by far-right candidate Marine Le Pen.

Still, many pros are bullish about Europe. Per the CNBC article:

"In spite of the French presidential election starting in less than a week, investors’ perception of Europe is increasingly bullish," said Ronan Carr, BofAML European equity strategist. "Although we agree on the allure of Europe’s earnings recovery, complacency looks extremely high."

While the pros might be bullish or even just complacent about Europe, the fear factor here at home is rising.

The CBOE Volatility Index, or VIX, has just reached its highest level of the year. That shouldn’t be much of a surprise given the geopolitical angst combined with the lack of progress on the pro-growth Trump agenda.

The VIX has risen 20.5% since April 6, when the U.S. bombed a Syrian airbase. Meanwhile, the S&P 500 has fallen 0.8%.

Yet the latest move higher in the VIX has at least a few market pros looking at the latest development as a contrarian indicator.

In a (separate) article at CNBC, trader Stacey Gilbert of Susquehanna noted that the VIX went inverted last week. Meaning, the front month’s reading of expected volatility was higher than the reading of the next two months’ expected volatility.

That means traders are anticipating higher volatility in the nearer term than they are in the longer term.

"That typically doesn’t happen; it’s very rare for it to happen. But when it does, and at the levels that we saw on Thursday, over the next 30 days the market typically is higher, let’s say on average around 2.3 percent higher," Gilbert commented Monday on CNBC’s "Trading Nation."

Here’s another "contrarian indicator" that the market is so replete with. And, it might mean that, if you are a trader, now is the time to start nibbling on long positions.

That’s not just my idea. It’s also the thinking of trader Ari Wald, Oppenheimer’s head of technical analysis.

Wald points out that historically, when the VIX spikes while the market is in an uptrend, above-average returns tend to be seen in stocks over the coming three to six months.

Per CNBC:

Since 1990, when this signal between the VIX and the market is triggered as it was last Thursday, the average gain over the next six months has been 8 percent, versus 4 percent for any six-month period.

So, if you’re a trader, take note.

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And if you’re a metals trader, here’s something else you’ll want to take note of …


Mining for Money

Copper’s Slide Could Squeeze Silver
By Sean Brodrick

Have you seen the price of copper lately? It surged mightily in 2016 … but stalled out this year. Now, it seems to be slip-sliding lower. And it just hit a three-month low on Tuesday.

This goes against conventional wisdom. And it is bearish for silver supply … which means bullish for silver prices.

Whew! That’s a lot to digest. So let me clear things up. I’ll start with a chart of copper’s recent price action.

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The black line is the price of copper. You can see it peaked in February. It has channeled lower ever since.

Now, there is nearby support at $2.51. And maybe that will hold. It’s quite a drop down to the next level of support.

This is happening despite news that should be bullish for copper. For example …

  China’s GDP expanded at a rate of 6.9% in the first quarter. That is better than expected. China is the world’s biggest copper user. China is likely to continue stimulus spending on big projects, which use up a lot of copper.

  The International Monetary Fund raised its forecast for global growth this year to 3.5%. That’s up slightly from January’s forecast. And the IMF sees global manufacturing and trade picking up. Again, that should be bullish for copper.

  President Trump just said that his $1 trillion infrastructure spending bill is "coming fast." That should also be bullish.

So why is the price of copper going down?

Maybe investors think the Chinese GDP numbers — and political projections and promises — are a bunch of hot air.

Some point the finger at Chinese wealth management product (WMP) investors. Axiom Capital Research says:

"WMP investors bet on trends that are easily predictable. Thus, these investors don’t care if prices are falling or rising; they simply play the momentum."

Axiom pointed to Chinese WMP investors for the recent sharp decline in iron prices. But it could apply to copper as well.

And yes, this could impact global silver supplies.

See, most silver comes as a byproduct of mining other metals. Only 30% of silver is from primary silver mines. In 2015, 34% of silver came from lead/zinc mining, and 22% came from copper.

And here’s an interesting fact. The 2016 World Silver Survey says the biggest increase in silver production came as a byproduct of copper mining. Copper mining rose 7% in 2015-’16.

If copper prices keep declining, producers will have no incentive to proceed with new mines. They might even shut down some existing mines. Though I think that prices would have to fall a lot for mines to shut down.

Still, the squeeze could be on for silver byproduct production. And that would compound the already-tight global supply I told you about in a previous article, "Silver Miners’ Dirty Little Secret."

Here’s the chart on global silver production from that previous article …

A Reuters survey says silver production fell 3% last year. It’s likely to keep falling. It takes years — often more than a decade — to bring a new mine online.

Bottom line: Listless copper prices will be one more force squeezing silver supply. And that’s another ingredient for the rocket fuel that will push silver prices higher.

There are some great ways to play the coming silver crunch. Little-known miners, developers and explorers that are poised to reap mountains of profits. Make sure you’re positioned before the next big move.

All the best,
Sean


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I want to know what you think, so if you have a comment or question about today’s Afternoon Edition topic, or any of the topics we cover, just leave me a comment on our website or send me an e-mail.

Good luck and happy investing,

Brad Hoppmann
Publisher
Uncommon Wisdom Daily

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