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Fear and greed rule the markets – China is the latest example of that old adage which is so very true.

And market “irrationality” (driven by emotions) should be viewed as the norm, not the exception.  As Jim Cramer wisely commented, “The worst mistake, the most common mistake you can make these days, is to say that because a particular stock or commodity trades at a given level, it therefore deserves to trade there. Often, that is just fiction now.”  In other words, market irrationality, such as the extreme negativity surrounding Gold that emerged this summer, is something we can all learn to take advantage of. 

Dow’s First 500+ Loss In 4 Years

Fear ruled the markets this past week as the Dow tumbled 1086 points, including 531 points yesterday, or 6% over 4 sessions, putting it in “correction” territory (down 10%) for the 1st time since 2011.  The last time the Dow closed more than 500 points lower in a single day was on August 10, 2011.  That proved to be a great buying opportunity, despite the panic at the time when the Volatility Index (see below) reached a high of 48.

China is struggling with a nasty flu and that country’s virus has spread to global equity and currency markets, and many commodities.  Gold, the most enduring currency of all, was the big winner last week as it climbed $46 an ounce or 4.5% while the TSX Gold Index surged 7.7%.

Stay Focused On The “Big Picture”

Who knows what Monday may bring, but the “Big Picture” we see emerging is an extraordinary, historical opportunity for speculative investors in high quality juniors and certain Gold producers who could be positioned for exponential gains over the next 6-12 months given the nearly 80% drop in the Venture since early 2011, the 70% tumble in the TSX Gold Index over the last 4 years, and the current global volatility.

The Venture’s 2nd-worst July on record – a drop of 11.4% – has been followed by a further decline of 9.4% so far in August.  The Venture is in the grips of a final capitulation, in our view, that will lead to much different conditions during the final 4 months of this year – there are historical precedents for this, and the current Venture long-term chart is a mirror image of the late 2010/early 2011 extreme overbought conditions that emerged following the Crash of 2008.   Those who can discern that “Big Picture” and don’t succumb to fear could reap a giant harvest from the seeds that have been planted to date and fresh seeds that can yet be planted in “productive soil”.  Incredible opportunities always emerge when the masses run in the same direction for too long.

Volatility Index (VIX) Update

In the context of the above, particularly the fear factor, look how the RSI(14) on John’s 10-year daily VIX chart (considered the “Fear Index”) has spiked to a level seen on only 3 other occasions since the beginning of 2008.  The VIX itself has been up more than 10% 3 days in a row, an unusual move that apparently has only happened twice in 21 years – March 1994 and October 2014.

The VIX needs to be watched closely – it hasn’t necessarily peaked just yet, but the “smart money” has always gone against the extremes in this index.  The straight-up move in the RSI(14), to above 80%, is extraordinary as the chart reveals.

The VIX closed at 28 Friday.  Stocks recover when the VIX retraces and stays below 25.    The VIX shot up as high as 48 in the spring of 2010, 48 in the summer of 2011, and 31 in the fall of last year (exceptional buying opportunities at those times).  During the Crash of 2008, the VIX spiked as high as 90, and that’s when many fortunes were born.

On a side note, one has to wonder what’s going through the minds of Fed members right now, and what sort of surprise China’s going to come up with next.