Defensive assets of all kinds, including all bond funds, the shares of well-known household companies, and all of the other high-dividend "quality" which financial advisors have been hammering home during the past year, have mostly begun downtrends which are not mere corrections. These assets will continue lower until they have suffered severe bear markets which probably won't end until 2015, and which will result in the best-known U.S. companies including KO, CL, VZ, and others losing half or more of their value. Since many of the above and other popular names have approximately doubled since July 2009, it is hardly an exaggeration to envision their surrendering the last three years' worth of gains as the shares of commodity producers had already done earlier in the year. The only difference is that it will take longer for the decline to mature. Whenever any kind of investment becomes irrationally popular, you can be certain that it will suffer precisely because of its widespread acceptance.
Fund withdrawals, as reported weekly in Barron's, demonstrate an accelerated rate of investor outflows from equities while most stock markets are close to setting new four- and five-year peaks. It isn't possible for a stock-market rally to end when amateurs and hedge funds are heavily selling; they have to be convinced one way or another to get back into the market. Therefore, the S&P 500 will likely approach 1500 and probably surpass it within the next couple of months. The shares of commodity producers will gain several times as much as the broader equity market, first breaking and holding above their respective 200-day moving averages, and then soaring higher as investors all rush to buy them at the same time. Funds of commodity producers and the funds of emerging markets with heavy commodity production including Russia and Brazil have been among the top equity subsectors during the past several weeks, which will likely continue for several more months.
U.S. Treasuries will be among the worst performers during the next few months. TLT, a fund of U.S. Treasuries averaging 28 years to maturity, will likely slump dramatically. The traders' commitments showed commercials being heavily short the 30-year U.S. Treasury bond several weeks ago, which they have been progressively covering. As Treasuries surprise almost everyone by plummeting, this will eventually create a buying opportunity for Treasuries, but not until almost everyone who currently owns them has given up on the possibility of a strong rebound. Don't buy TLT at 120 or even at 110; it is essential to wait for a much deeper retreat toward 100 before stepping up to the plate and buying TLT in anticipation of its next rally above 130.
Disclosure: In the second half of July I added to my substantial long positions in funds of commodity producers. My largest positions remain GDXJ, VFWPX, KOL, XME, EWZ, RERGX, SLX, REMX, RSX, TNRPX, VGPMX, TRIEX, FCG, GDX, and NLR, in that order, with by far my greatest concentration in GDXJ.
