Monday, March 11, 2013

"You have to pretend that your life is a financial pleasure even when your autographs are bouncing." --Kinky Friedman

THE SHIFT INTO COMMODITY SHARES HAS BEGUN AND WILL ACCELERATE (March 11, 2013): Most market analysts have been paying too much attention to well-known benchmark averages, such as the S&P 500 and the Dow Jones Industrial Average. Because of this, very few have noticed the unusual disparity between the behavior of high-yielding assets, such as utility shares, REITs, telecommunications giants, and other financial advisor favorites which have soared in recent years, versus commodity producers whose shares have struggled to achieve modest gains and which have generally underperformed most broad-based equity indices.

We have finally begun what could be a historic shift from the incredibly popular high-yielding names into companies which produce steel, generate energy of various kinds, or mine for metals and related raw materials. Gold mining shares in particular had slumped all the way back to their lowest levels since July 13, 2009 last week, and remain dramatically undervalued by all historic measures. There has also been notable buying of gold mining shares and other energy producers, especially among mid- and small-cap companies listed on Canada's TSX Venture Exchange and elsewhere. During the past few weeks, there is increasing evidence of higher lows and more frequent recoveries from early selloffs for the shares of commodity producers, while high-yielding assets have more often retreated from early morning gains.

One key feature is how momentum players, who constitute a substantial percentage of active traders, will change their behavior if this shift becomes more pronounced. Many of these traders and other chart followers will tend to buy anything which has recently gained about 20%. This had benefited many of the top-performing equity sectors, which have now probably achieved most of their total increase and are unlikely to climb an additional 20%. The most oversold sectors, including mining and energy names, are therefore poised to be the next names which could gain 20% from their recent deep bottoms, and could thereby become momentum-player favorites.

Confirming evidence of this shift can be seen in the traders' commitments for the Canadian dollar, which showed commercials establishing their most extreme long position in the loonie since March 2007 before it enjoyed a historic surge to more than 1.10 U.S. dollars. Whenever the Canadian and Australian and New Zealand dollars are climbing, this coincides with a rally for commodities and the shares of their producers--partly because all three of these countries have unusually high ratios of commodities to people. Too many speculators have been betting against these commodity-country currencies, making such an overcrowded trade increasingly likely to be busted. I expect to see all three of the above currencies gaining several cents versus the U.S. dollar during the next several months.

Disclosure: Since May 2012 I have been progressively accumulating long positions in funds of commodity producers into pullbacks and especially whenever they have been forming higher lows. I also bought many funds of general equities near all of their important low points in 2012, which I have been progressively selling since January 28, 2013. From my largest to my smallest position, I currently own GDXJ, KOL, XME, REMX, SLX, VGPMX, GLDX, FCG, BGEIX, GDX, and VFWPX.