Tuesday, October 30, 2012

"The four most dangerous words in investing are: 'this time it's different.'" --John Templeton


THE MOST IMPORTANT LEADING GROUPS ARE POINTING THE WAY HIGHER (October 29, 2012): Probably the most important leading cyclical subsectors are semiconductor producers, gold mining shares, and coal mining companies, not necessarily in that order. All four of the above have recently been outperforming the broader equity market, as you can verify by looking at charts of SMH, GDX, GDXJ, and KOL. Stock markets worldwide began an important intermediate-term correction around 10:30 a.m. Eastern Time on Friday, September 14, 2012. Following the Fed's infamous QE3 announcement, there was a brief surge higher for risk assets for merely 22 hours, followed by more than six weeks of declines. As many analysts and advisors have turned increasingly bearish in recent weeks, top corporate insiders have almost completely stopped selling and have gradually begun to accumulate the shares of the most undervalued equities. Amateurs, meanwhile, have accelerated their outflows from stock mutual funds.

Long-dated U.S. Treasuries and their funds including TLT have continued their important downtrends which began on July 25, 2012. TLT has made numerous attempts to hold above its 50-day simple moving average, and has failed each time. TLT will soon plummet below its 200-day moving average on the way to an important bottom and a buying opportunity somewhere between 95-105 during the next several months. Meanwhile, cyclical equities have been doing the opposite, periodically dropping below their respective 50-day moving averages while continuing to form bullish patterns of several higher lows. Adding to your positions in cyclical shares each time any given asset drops below its 50-day moving average is an excellent way to accumulate bargains which are likely to increase by an average of 20%-30% during the next several months.

Many investors are obsessed with the U.S. Presidential election on November 6, 2012, believing that if Obama wins certain subsectors will be "winners", while there will allegedly be a different set of top performers if Romney triumphs. In my opinion, fear over the outcome has become so widespread that the stock market will rally no matter who prevails. Since a Romney victory would be an unexpected surprise to the financial markets, it would likely be greeted by a sharp surge higher which could provide a selling opportunity if it transforms itself into a nearly vertical climb. On the other hand, a less exciting Obama re-election would probably be greeted by a more leisurely continuation of the pattern in recent months of a more gradual but still significant uptrend.

While almost everyone is still gloomy, be bold and purchase several of the funds listed below. Most of these traded during the past several months at their lowest points since July 2009. Meanwhile, defensive high-dividend assets have mostly doubled from their July 2009 lows. With nearly all financial advisors still telling their clients that they should primarily own anything with an above-average yield, this has caused an absurd crowding into dangerously overvalued defensive shares while almost no one wants to own deeply undervalued cyclical equities. The current disparity is at an all-time record by many measures. While everyone else is chasing after yield, run as far away as you can from it.

Disclosure: Since May 2012 I have progressively accumulated substantial long positions in funds of commodity producers near their lows. I currently own GDXJ, VFWPX, KOL, XME, EWZ, SLX, REMX, VINIX, VEMPX, RERGX, RSX, VGPMX, TNRPX, TRIEX, FCG, TAN, GDX, and NLR, in that order, with by far my greatest concentration in GDXJ.