Stocks came under substantial pressure on Thursday, pushing the benchmark S&P 500 Index to its largest one-day knockdown since early April, and the sell-off continued through much of Friday as well.
The most alarming aspect was that there really was no immediate catalyst. The go-to excuses — which are actually contradictory, if you think about it — were, on the one hand, disappointing earnings in both Europe and the United States, more worries about the spillover of the Ukraine crisis and Russian sanctions to the underlying global economy, renewed contagion concerns on Europe’s financial periphery and Argentina’s credit default…and on the other, heightened Fed angst about not exiting their accommodative stance fast enough in the wake of the stronger Q2 GDP and ECI prints.
To make it more plain, market participants seem to be concurrently worried about the economy being too weak and too strong at the same time. And moreover, they appear to be worried about a debt default in Argentina, whose entire economy would fit into NBA star LeBron James’ lunchbox.
Personally, I hope that it was really the Argentine thing because, as we all know, Wall Street can never muster much concern about anything that happens more than about five miles offshore from Manhattan for very long.
With such a broad number of stocks reeling, and sentiment now very sour, the greatest likelihood is for a rebound. Unless there are very unusual conditions, sessions like these typically lead to the transfer of shares from weak hands to strong hands. That’s kind of a cliché, but it means that people without conviction about the positions that they hold end up selling them willy-nilly, and the buyers at these fire-sale prices are people who have a lot more knowledge about their value. You could say that shares move from the public at low prices to the smart money at funds who then hold for gains…though, of course, there is a lot of dumb money at funds too!
Bottom line: Mini-shock days like these have been fairly consistent in leading to short-term follow-through, then intermediate-term positive returns. Along these lines, today I’m recommending a long trade that I expect to do particularly well in the coming weeks.
Royal Gold (RGLD) is an unusual stock in the gold mining sector in that it does not mine for gold itself — it acquires royalty interests in miners’ operations and finances mines in exchange for royalty interests. The $5 billion, Denver-based firm has an unusually persistent record of advancing in August.
RGLD sank on Thursday in the broad sector smackdown related to the Argentine default and rise of the dollar, but recovered on Friday. As you can see in the chart above, the shares are back above the trendline of the two-hour bars over the past three weeks.
Buy RGLD common at $76.25 limit, good till canceled, for target $78.25.
Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.