Monday, November 26, 2012

"Be a contrarian. Buy when others are smiling at you. Keep purchasing as they snicker at you. As they start laughing at you, become fully invested." --Irwin T. Yamamoto

HOLD ONTO CYCLICAL SHARES WHICH HAVE JUST BEGUN TO OUTPERFORM (November 26, 2012): Since they completed important higher lows on the morning of November 16, 2012, cyclical shares have been notably outperforming the broader equity market. The shares of commodity producers, semiconductors, steel manufacturers, well-established emerging markets including Brazil and Russia, and related materials producers had mostly retreated to their lowest levels since July 2009 during the past several months, thereby becoming compelling buying opportunities. Top corporate insiders once again added to their positions in cyclical equities during the middle of November with the ratio of insider buying to insider selling at more than twice its long-term median level. Among the most undervalued assets today are the shares of coal mining companies and those relating to rare-earth extraction. Junior gold mining shares also remain notably out of favor. Many of the above subsectors are likely to challenge their highs from the early months of 2012 during the early months of 2013, as we once again experience a common pattern of cyclical strength in the late autumn and for most of the winter. This will thereby become the fifth year in a row where it was quite profitable to buy in late October and/or during the first few weeks of November.

Safe-haven assets including U.S. Treasuries have remained dangerously popular with investors. TLT and similar funds, which have dropped only modestly from their respective all-time highs in July 2012, are likely to accelerate their downtrends. If it becomes possible to buy TLT anywhere near 100, be prepared well in advance to progressively seize that opportunity as it will likely eventually climb to a new all-time high around 140 near the end of 2013 or during 2014. One reason we can't have a recession any time soon is that far too many investors own TLT and other assets which would benefit from a global economic contraction. Almost all of these investors have to be convinced to close out their positions, mostly at a loss, before safe-haven assets including U.S. Treasuries eventually surge to historic peaks.

The traders' commitments released at 3:30 p.m. Eastern Time on November 26, 2012 indicated that commercials, who are insiders whose livelihood involves buying and selling those assets which are connected with their industries, added to their long positions in copper, the euro, and the Swiss franc. Historically, all three of the above--especially copper--have a strong historic correlation in which long positions are followed by gains for cyclical equities. The short position in the 30-year U.S. Treasury bond increased during the past week, demonstrating that the most knowledgeable traders are betting more heavily on lower prices for U.S. Treasuries. This implies higher Treasury yields during the next several months.

There is a lot of debate about the S&P 500 index and what it will do during the next few months or years. Most analysts are bearish in the short run and bullish in the long run, so assume the exact opposite. We will almost certainly experience a new all-time high for the S&P 500 index as it climbs during the first several months of 2013 above its previous all-time zenith of 1576.09 from October 11, 2007. This false upside breakout will convince millions of people to buy stocks when they should be selling them. Because the financial markets will always act in whichever way will harm the greatest number of investors, a new nominal high for the S&P 500 and perhaps also for the Dow Jones Industrial Average would be the perfect way to confuse as many participants as possible by encouraging equity inflows instead of outflows.

After the S&P 500 tops out around 1600 in the winter or early spring, it will be set for a two-year plunge to roughly 600. Not many people believe that the S&P 500 will either surpass its all-time high or eventually slump below its well-known bottom of 666.79 from March 6, 2009, but both will happen within the next three years. The eventual false downside breakout, perhaps in 2015, will frighten many into selling when they should be aggressively buying. Here's a guide to succeeding during the next decade, which is the same method which would have worked during the past: buy whenever most people you know are selling, and sell whenever your friends, family, and neighbors are buying.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they are forming higher lows. From my largest to my smallest position, I own GDXJ, VFWPX, KOL, XME, EWZ, REMX, SLX, VEMPX, VINIX, RERGX, RSX, VGPMX, TNRPX, TRIEX, FCG, TRSPX, ACTIX, TAN, GDX, and NLR.