In last week’s Thoughts, we delivered an edition that sounded more optimistic about the stock and precious metals markets than it has in a long time. Yes, we mentioned that further escalations are possible in Iran. And yes, this war is not over yet, even though U.S. President Trump is now talking about a possible withdrawal. This war is far from over; it has massively shifted the global political landscape, and we will continue to feel the consequences in the years to come. The geopolitics of the Middle East are likely to be reshuffled, as are the global flows in the energy market and, presumably, the balance of power within the NATO military alliance. But we are not political experts; we have our sources for that. We focus on the financial markets. And they are true masters at adapting. We should not forget: The financial markets pool the collective knowledge of all participants. And the market seems to have concluded that the cards have been reshuffled, and trading is proceeding exactly accordingly.
Our conclusion last week was that the financial markets would increasingly decouple themselves from this vexing war. Investors had previously hedged their positions as never before, which is why the correction was not as severe as many had expected. Furthermore, sentiment shifted so rapidly into the deepest pessimism that further massive selling pressure was hardly to be expected. This situation alone suggested that the market would explode at the slightest positive geopolitical turn—which is exactly what we are observing currently.
Geopolitically, however, we stand by our assessment: The world has changed, little to nothing has been resolved, and the Middle East has likely become even more unstable. Consequently, market volatility is likely to remain high. But the bottom line—which, as an exception, we’re presenting right at the start of this issue rather than at the end—remains the same: Even after yesterday’s gains, the stock and precious metals markets remain mired in such pessimistic sentiment that the upside potential remains very high. We’ll attempt to provide confirmation of this with the following charts.
Not entirely surprisingly, Wall Street remains in the valley of tears even after yesterday’s strong recovery. Pessimistic as rarely before.
The general sentiment does not signal to us that we have already seen the bottom. That would require a positive news flow. What we are receiving, however, is the clear message that a counter-movement will be very strong and very sustained as soon as positive news arrives.
The spread between the spot and the 6-month futures contract of the volatility index also remains extremely high. Let’s remember: The market knows more than the individual participant. And it is telling us that it expects a significantly calmer environment in six months.
The indicator that reveals the activities of smart investors behind the scenes signals that they are accumulating heavily on Wall Street. The light blue area most recently indicated massive distribution—but the latest data now points to accumulation again.
Interesting: There has also been massive distribution in European stocks recently. Yet there is currently hardly any sign of accumulation in European stocks. One gets the impression that, with the geopolitical developments, Europe has once again been left holding the short end of the stick—whether on the issue of energy or perhaps also regarding the evolution of military alliances, even if that is still speculation at this point. Yet investors’ indifference speaks volumes… and it does not exactly whisper optimism.
Now a look at Japan, which is particularly affected by energy supply issues stemming from the blocked Strait of Hormuz: Distribution by smart investors has been surprisingly mild in recent weeks, and the Nikkei Index has lost comparatively little ground. Recently, however, selling pressure has been extremely strong, as indicated by the red “Exaggeration” line. The fact that the index was able to absorb this pressure without further losses can certainly be interpreted as a very bullish sign.
Back to Wall Street: The Balance of Power measures the balance of power between bulls and bears in the market. The bears recently had the upper hand as rarely before. Precisely for this reason, this indicator is only truly helpful in extreme situations. Currently, however, it signals that the bears have likely largely exhausted their strength. Usually, the bulls strike back with similar force afterwards. Which sectors are likely to benefit most from this? We are focusing primarily on AI and quantum computing. We will delve into these topics in the near future, but once again, Google has already opened the next chapter (Link).
In last week’s Thoughts, we also pointed out the positive starting point for precious metals. The massive correction since late January has likely washed many investors out of the market—in some cases, not exactly gently. In fact, distribution among smart investors was extremely strong, not only in the West but also in the Chinese gold market, which continues to operate in a different reality than the paper market in the West. The consequence, however, is that many investors likely have too little gold in their portfolios. We’ve already mentioned it: geopolitics is likely to continue playing into the hands of precious metals.
The euphoria in the silver market has completely evaporated since the end of January. The market has thus been reset and can turn a new page. Should this turn out to be bullish—which we expect—a new starting point emerges: The number of open futures contracts in the silver market has fallen to a multi-year low. Increases in margin requirements by the exchange, which repeatedly interrupted or limited the silver rally during the euphoric phase, are therefore unlikely to have the same effect anymore.
The final word this week goes to palladium, which is often overlooked among precious metals. Here, too, the same chart reveals a distinctly bullish constellation…
