"I don't look to jump over seven-foot bars; I look around for one-foot bars that I can step over." --Warren Buffett

CYCLICAL SHARES WILL CONTINUE TO OUTPERFORM (September 10, 2012): When I last updated this web site, cyclical shares were dramatically out of favor with investors. During the past year, financial advisors have been almost unanimously recommending "quality high-dividend stocks" and "defensive recession-proof companies" and "reaching for safe above-average yields", thereby causing investors to dangerously crowd into utilities, tobacco shares, consumer staples, telecommunications companies, REITs, and similar assets which thereby mostly doubled from their July 2009 lows. At the same time, cyclical shares were popular with almost no one, causing their prices to be about the same as they had been in July 2009. This created an obvious trading opportunity: sell overvalued defensive equities and buy undervalued cyclical ones. I aggressively accumulated energy and mining shares beginning in May 2012 and continuing through last week when KOL, REMX, and SLX remained highly attractive for purchase through Wednesday, September 5, 2012.

Since then, cyclical shares have been among the top performers of all asset classes. My largest recommended holding, GDXJ, finally broke above its 200-day simple moving average, while previous laggards including KOL and REMX have been among the top winners in recent trading days. My other holdings (see "Disclosure" below) have mostly been outperforming the S&P 500 and other general equity indices.

Investors have continued to make outflows from equity mutual funds, while hedge funds remain historically underinvested in equities and other risk assets. Therefore, the uptrend for the S&P 500 and similar assets is likely to continue until we finally experience far more media optimism and net amateur inflows. One important exception is defensive shares, precisely because of their ridiculous popularity. Nearly all defensive, high-dividend equities and related assets began important downtrends in early August 2012. These are not merely corrections: such assets have probably begun major bear markets which will continue until 2015 and which will result in these assets losing roughly half or more of their total value even after adjusting for reinvested dividends.

Some hedge funds and momentum players have noticed this vital switch, and have progressively repositioned their portfolios by selling defensive equities to purchase cyclical ones. This process will likely accelerate for the next few months. The shares of commodity producers have been among the biggest percentage gainers in recent weeks, which will probably continue at least for the next several weeks. Many shares of commodity producers had slumped by half or more from their respective highs of the early months of 2011, and as a result have significant potential remaining upside. Just regaining their February-March 2012 highs will require a meaningful double-digit gain for most of them.

U.S. Treasuries and bond funds of all stripes remain irrationally popular, and will decline sharply during the next few months along with defensive high-dividend equities. With almost all investors shunning safe time deposits which pay less than one percent, there has been an incredible frenzy for yield. Like the chase for internet shares in 1999-2000 or U.S. real estate in 2005-2006, it will prove to be toxic for the many who have participated in this quest--which is highly dangerous precisely because so many others have jumped aboard the same bandwagons. By definition, any extremely popular trading concept must fail because it creates an unsustainable price distortion.

Disclosure: During the past four months I have progressively accumulated substantial long positions in funds of commodity producers near their lows. My largest positions are GDXJ, VFWPX, KOL, XME, EWZ, REMX, SLX, RERGX, RSX, VGPMX, TNRPX, TRIEX, FCG, TAN, GDX, and NLR, in that order, with by far my greatest concentration in GDXJ and with recent notable purchases of KOL, REMX, and SLX.