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Successful investors demonstrate caution in frothy markets and steadfast conviction in panicky ones. Indeed, the very way an investor views the market and its price fluctuations is a key factor in his or her ultimate investment success or failure."

—Seth Klarman

- Enjoy more of our favorite value-investing quotes


August 24, 2015


In This Edition:

- Largest-Ever Spike In Volatility Index
- The Most Volatile Day In History
- The Barrage of Financial Fright Stories Has Started

- You Can Time The Markets
- We Don't Engage In Predictions
- Not All The News Is Grim

(Read Part 2, Read Part 3)





WHAT ARE THE RISKS, THE OPPORTUNITIES, and how can you make money?

PART 1 of 3


On Thursday, August 20, the US stock market began a sharp selloff that spooked many investors with its intensity. With serious economic issues in many parts of the world, some investors now wonder if we are on the verge of a global financial meltdown. While the selloff in the US has only been 10% so far, the rapidity and forcefulness of the downturn has shocked many investors who had become complacent and accustomed to steadily rising prices.

This complacency was ostensibly the result of what many consider to be a Federal Reserve 'put' on the market. Since it began its zero interest rate and quantitative stimulation policies more than six years ago (in late 2008), each time it has backed off of QE, asset prices swooned. Almost immediately, the Fed came back to prop up stock prices with new QE programs. We've had QE1, QE2, QE3, Operation Twist, and 'QE-Infinity.' The last QE program ended in October 2014.

However, that calm of the markets was broken on Thursday, August 20, when the S&P 500 declined about -2.2%. Although this was nothing serious, it was notable following all of 2015 without a fluctuation in prices of more than -2%. The next day, Friday, August 21 saw the market drop by a bit more than -3%; a development that started getting people's attention. Then Monday, August 24 was the day when all hell broke lose.  The Dow Industrials set a record for volatility, plummeting -6.61% in the first few minutes after the open (see the story below). The S&P 500 finished the day down -3.66%.  Then on Tuesday, the S&P closed down another 1.63%.

All said, from Tuesday, August 18 through Tuesday, August 25, the S&P 500 dropped about 234 points or about -10%, which puts it officially in 'correction' territory.

The S&P 500 has dropped about 10%, which is considered a correction. As long as it does not drop below the


Fortunately, IntelligentValue subscribers have been able to sit back comfortably and watch the recent turmoil with benign interest. We are comfortable in the knowledge that we sold each of our positions over the course of the last two months. This followed our identification of significantly increased risk, which we announced in our June 28 Value Alert newsletter, "Big Change Coming to the Market Starting This Week." We are now able to assess the situation from the comfort of cash and make strategic plans with a clear mind.

 In this 3-Part article, we hope to analyze both the risks and opportunities presented by the equities market today and come to a rational conclusion upon which we can base profitable plans and action.

Largest-Ever Spike In Volatility Index

In our June 28 Intelligent Value Alert newsletter, we addressed the fact that volatility had dropped to extremely low levels. At that time, there hadn't been a single day in 2015 with a move greater than 2% in the S&P 500 and that index had gone eight straight weeks without even a 1% move. It had been 20 years since the last time that scenario occurred. We told you at that time that a furious reversion to the mean was inevitable, and volatility would spike sharply. That volatility spike began last week, and we believe it will continue for some time.

The CBOE Volatility Index jumped Friday to levels not seen since December 2011, logging its largest ever weekly percentage increase as stocks sold off for a fourth straight session. The VIX, or so-called 'fear index,' surged more than 47% to 28.21 right after the close. For the week, the index is up nearly 120%, making it the largest weekly percentage jump in the VIX’s history, according to FactSet data.


In more news related to volatility, on Monday (Aug 24), in the first 3 hours and 40 minutes of trading, the Dow posted the largest intraday swing in history. Opening the session at 16,460, the blue-chip index plummeted 1,089 (-6.61%) points in the first few minutes to hit a low of 15,370. However, by mid-day, the Dow had recovered 980 points (5.95%) in just 3 hours. That set the record for the largest recovery in history.

But the story wasn't over. This volatile, record-setting day saw the Dow drop again in the afternoon, this time to 15,800 (-3.36%). Then it went up one last time to about 16,075 before closing the day at about 15,871. So the story of the most volatile week in history resumed this week with the most explosive day in history:

   The Most Volatile Day In Market History was Monday, August 25

We do not expect a continuation of these record-setting days of volatility. However, reversion to the mean is the most powerful force in investing. It is very likely that the long period from November 2011 to August 2015 with little volatility will be compensated for in coming months with extraordinary volatility. This increased volatility does not mean that you need to hide under the sheets. In fact, when properly antipated, volatility can be your most lucrative friend.

The Barrage of Financial Fright Stories Has BEGUN

Following the selloff that began on August 20, the media has been chock-full of alarming stories with headlines such as, "The Bloodbath in Global Markets" and "Did the Crisis of Our Lifetimes Begin Last Week?" This comes as the US market (at the time of this writing) has had only four days of a selloff and a downturn that so far has totaled just 10%, so it's obviously nothing serious yet. In fact, a 10% downturn is considered a correction and is typically healthy for the market.

However, investors are giving the recent market action their attention for a good reason. The extreme volatility of the last week is setting records and grabbing the attention of investors and the man on the street alike. For many, the fear gauge is going off the charts.


The media has a substantial profit incentive to push fear. As they say in the news industry, 'if it bleeds, it leads'. The same principle applies in the investment world. But the media is not forcing their audience to accept mental self-torture; the media is just catering to demand. In fact, at the height of the financial crisis in 2008, the viewership of CNBC television spiked to 1300% above its normal average. The bottom line is that you will likely be reading or watching a constant barrage of sensationalistic negative financial stories if you choose to expose yourself to that information source right now. We recommend to our subscribers that they turn off CNBC and stop reading the over-the-top articles on websites such as MarketWatch.

In this 3-part series, I will try to utilize 34 years of experience as an investment professional and present a balanced view of the current economic and market conditions. My objective will be to reach some rational conclusions about what is coming next for the equities markets. I will attempt to provide you with a reasonable approach that will result in profitable investments with minimal drawdowns and less stress.


We have no incentive in this report to come to either a bullish or a bearish conclusion. IntelligentValue is not a long-only stock advisory. By utilizing both undervalued stocks during bull markets AND at the appropriate time, bonds or inverse ETF's in bear markets, our model portfolios can profit in all economic environments and market conditions.

Our approach, which utilizes a rules-based system for identifying market risk has resulted in consistent profits every year since our launch in 2004 (including during the 2008/2009 market crash). As a result of our identification of market-related risk, drawdowns are minimal, with an average drawdown of just 14% and annual returns topping 90% and 145% for our two model portfolios.

We frequently hear it said that 'you can't time the market.' However, we have been successful in doing just that, in a publicly published newsletter with portfolios for subscribers that are updated weekly, for more than a decade. Our track record speaks for itself. We have sidestepped the downturns without being whipsawed, then re-entered the market with full portfolios of undervalued stocks when our system identified that risk had abated.

It is our opinion that the people who say 'you can't time the market' are actually lamenting that they don't really know how to time the market. Market timing in one form or another is being done by many top investors with great success. The approaches to market timing is myriad, with hundreds of approaches from a variety of angles. Even Warren Buffett, who eschews technical analysis, is timing the markets in his own way. He purchases undervalued stocks when their prices meet his requirements for value – usually as a result of the broad equity markets declining and stock prices reaching a level that meet his requirements for purchase.

There are a multitude of ways to time the markets. IntelligentValue uses a multi-disciplinary approach, developed over the course of 20 years, that utilizes select technical analysis indicators, a bit of top-down macro analysis, and fundamental, bottom-up analysis. We have identified the indicators that are most effective in determining turnpoints in the market and focus our attention on those indicators. 

We also shut out the noise coming from the media, with its endless parade of 'experts' with a seemingly unlimited supply of opinions that can adversly effect your decision-making. I have not turned on CNBC for years! The market itself will tell you everything you need to know.

The combination of multi-faceted indicators we use has been extremely productive, allowing us to sidestep (frequently to the day) the selloffs and perfectly timing the liftoffs of the overall market. By avoiding market-related risk and embracing bullish upturns, we have been able to triple the returns we would have experienced had we not engaged in a well-developed program of market-related risk avoidance.

is unusual in an industry that seemingly lives on forecasts. Usually, we do not engage in these fatidic speculations. Our approach is to assess and respond to the market conditions as they occur, not guess (which is what 90% of forecasters are doing) about an outcome and place bets on those guesses. However, on June 28th, we did engage in a little light forecasting in a newsletter titled, "Big Change In The Market Coming This Week." In that issue of the Intelligent Value Alert, we discussed the reasons why our analysis suggested that a change in the market was coming quite soon. Those reasons included:

• volatility had disappeared, and a reversion to the mean (much more volatility) was inevitable
• market breadth had deteriorated; number of leaders had dwindled
• the market was losing momentum and losing energy
• of the nine sectors in the S&P 500, the leaders were defensive: Healthcare, Consumer Staples, and Financials
• the leading technical indicators that we watch were signaling a downturn was imminent
• US company's revenues and profits were weakening

 At the time that newsletter was published, things were still seemingly calm and most advisors were bullish. Greece was in the news and there were some relative minor chatter about potential contagion, but otherwise it was business as usual in the investment world. Most people commenting on my article dismissed the predictions. Their main objection was that the US economy, while not a raging bull, was solid and employment was steady and growing. Leading economic indicators showed no recession in sight.

However, the following week volatility began to increase, especially in value-based indicies, such as the Small-Cap Value Index ($RUJ) and the Mid/Large-Cap Value Index ($RLV). Here we are about six weeks later, and it seems that all hell is breaking loose in the mainstream US indices. 23 global stock markets are crashing, the price of oil is collapsing, a potential currency war has erupted, industrial commodities are plunging, a full-blown financial crisis has gripped South America, and junk bonds and emerging markets are sending some very ominous signals.


With the market is showing extreme volatility, it may appear to some that the 'end is near' and this is the beginning of a global selloff that could rival the 2008 crisis. This emotional response may especially occur if you get caught up in the self-serving, frightening stories in the media. However, some economic fundamentals are providing different evidence. As an example, the US economy is still a bright spot in the world's economic turbulence. While we believe there is still ample evidence to be concerned about a severe selloff in coming months, the recent turbulence was most likely nothing more than a correction.

The chart below shows that for the S&P 500, prices have dropped precisely to the long-term, 6+ year trendline. This drop comes after stock prices moved far too high above that trendline in recent months. The chart below stretches back to the March 2009 low, shows touches in late 2011, mid-2012, and late 2012. Then, of course, there is the current touch this past week.

S&P 500: The long-term uptrend that began in March, 2009 is stil in place, despite the selloff of the last two weeks.

Many analysts have been warning that stock prices are overvalued for some time now (Schiller PE at 26, etc.). However, 'overvaluation' can continue for years, so valuation should never be used as a method of timing the market. IntelligentValue's approach does not take valuation into consideration for market timing at all. We focus on technical aspects of the market that can be clearly measured, keep things simple, and the result is successful.

Our approach warned that the selloff was coming and the subscribers who followed our suggestions did not lose a dime in the downturn. In fact, we are armed with cash and may be purchasing freshly undervalued stocks this weekend.


Coming in Parts 2 and 3 of this series:

• Global Markets Are Undergoing A Titanic Tug Of War
• Is the Chinese Economy at Risk of Collpase?
• Is it Possible That Global Debt Will Crash The US Economy?

• Currency Wars Could Trigger Massive Disruption
• What's the Risk of an Emerging Market Crisis?
• 23 Nations Around The World Where Stock Market Crashes Are Already Happening

• Are Central Banks Losing Control?
Post-Crisis Returns Atrophy Without QE Injections
• Is the Federal Reserve Impotent Now?

• No Sign of a Recession in the US Yet
• US Economy is Still Growing, Employment Still Improving
• Worries Over Major Top and Bear Market Are Still Too Early

• What to Expect From the Market in Coming Months
• What's Our Strategy Going Forward?


(Read Part 2, Read Part 3)

We hope that we have thoroughly discussed the issues in this Value Alert, and you can implement these ideas to your benefit.  Our objective is to give you the best value-oriented investment information possible, with ease of use, timely identification of the issues that affect our portfolio positions, and a full understanding of our approach.  If you have any questions or comments, please contact us with a support ticket.

Best Wishes for Another Week of Intelligent Value Investing,



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Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice. Shareholders, employees, and writers associated with IntelligentValue, Inc. may hold positions in the securities that are discussed. If you are not sure if value investing or a particular investment is right for you, we urge you to consult with a Certified Financial Advisor. Neither, nor any of its employees or affiliates are responsible for losses you may incur.