Reality comes back to bite investors

Oh, how the worm turns.

Only a few days ago, stocks were melting higher in a low-volume, no-volatility, seemingly invincible uptrend. The market hadn't suffered the indignity of a significant sell-off since the middle of May. And through Monday, the S&P 500 had logged 13 gains in 16 trading sessions.

A pretty impressive run made all the more impressive by a blowout of sentiment measures and investor positioning, by many metrics, to levels not seen since the 2007 and 2000 bull market tops.

But it's all reversing now as an anvil of reality hits with a thud. From no worries, the list of concerns has suddenly grown very long. Geopolitics, macroeconomics and emotions are all in play.

On Thursday, the S&P 500 dropped 0.7 percent for its third consecutive loss, its worst run since January. Consumer discretionary stocks, at the sector level, suffered the brunt of the selling pressure, falling 1.3 percent as a group.


A weaker-than-expected retail sales report contributed to the decline and threw some cold water on the running expectation that after a harsh winter, the economy is on the mend. Month-over-month growth of 0.3 percent was less than consensus increase of 0.5 percent, and so-called "core sales," excluding autos and gasoline, were flat. The trend, illustrated by clothing sales (blue line in chart above), isn't good and is calling into question the GDP optimism baked into the market at these prices.

The dominant force, however, were headlines seemingly ripped out of the Bush Administration era as Iraq is back in the news. An army of Islamic militants seized two major cities in the north (one, Mosul, is Iraq's second-largest city), captured hundreds of millions of dollars from a central bank branch and have forced the displacement of more than 500,000 citizens. The extremists are from a Sunni Muslim organization known as the Islamic State of Iraq and Syria (ISIS, also known as the Islamic State of Iraq and the Levant, or ISIL) and have threatened Iraqi oil refineries and could march next on Baghdad.

An outright civil war is a rising threat as Iran is reportedly sending elite Shiite Muslim commandos to bolster Baghdad, while Kurdish forces expanded their control by taking oil-rich Kirkuk. The situation looks very bleak.


Crude oil soared to nearly $107 a barrel in response. That's a level it hasn't seen since last September, and it could complicate the economic situation by pressuring already vulnerable consumers, pushing up inflation (which is already at the Federal Reserve's 2 percent target) and potentially forcing short-term interest rates to rise sooner than expected.

Energy-sensitive stocks like airlines and transportation were hammered.


Investors piled into safe haven assets in response, with gold and silver surging to the upside. The related mining stocks also moved higher, pushing the Market Vectors Junior Gold Miners (GDXJ) up 5.8 percent to move through its 200-day moving average for the first time since February.

I think gold and silver could really get a run going here not only on the geopolitical situation but also on rising inflation expectations.

Recent recommendations to clients and readers include New Gold (NGD), up 5.9 percent today and up 11.1 percent since I added it to my Edge Letter Sample Portfolio on June 5. NovaGold (NG) is up nearly 15% over this time.

Disclosure: Anthony has recommended GDXJ, NG, and NGD to his clients.

  • Anthony Mirhaydari

    Anthony Mirhaydari is founder of the Edge , an investment advisory newsletter, and Edge Pro, options newsletter. Previously, he was a markets columnist for MSN Money; a senior research analyst with Markman Capital Insight, a money management firm; and an analyst with Moss Adams focusing on the financial services industry.