Increasing market volatility, and tightening U.S. monetary policy are changing the investing landscape in 2016, creating new opportunities for profit. The most noticeable change in 2016 is that selling pressure is not automatically met with extreme bouts of buying. Tightening U.S. monetary policy, as well as a weakening global economy have increased risk aversion, leading to a sell the rally style of trade.
The decline in biotech stocks is a prime example of the new risk averse market. Where investors were once comfortable bidding up pharmaceutical companies to extreme valuations in a short period of time, now they are not. Anacor Pharmaceuticals (ANAC) had risen more than 4000% from its 2013 bottom to its 2015 highs. As market volatility has risen though, its high valuation on negative earnings deflated. It became a short candidate below 83, which it hit last week. For a company that has shown stellar gains during the previous bull market, its sudden weakness is a sign of shifting momentum.
Meanwhile, more defensive precious metal producers have seen large inflows in recent weeks. Over the same period that Anacor Pharmaceuticals was racing higher the past few years, precious metal producers saw steep declines.
The company I have been following is McEwen Mining (MUX - Get Report) . It formed a strong bottoming formation over the last year as overall equity markets traded sideways. While the prices of gold and silver have not developed a similar bottoming pattern just yet, this mining stock could be foretelling what is to come.
U.S. monetary policy is tightening, albeit at an expected slow pace in 2016, but other countries across the globe are expected to increase stimulus. Japan cut its key rate into negative territory recently, while China and Europe are expected to loosen conditions even further. While gold priced in U.S. dollars may not be primed for strong gains, gold priced in other currencies, such as the yen and euro could move considerably higher.
Risk assets were all the rage over the last few years, but the trend is clearly changing in 2016. While the magnitude of decline is still unknown, it is safe to say that a repositioning of your portfolio to match the current trading environment is needed.