Missed Some Upside, Chase is On

Sunday, September 26, 2010

A week for crying over spilled milk

After selling all my positions except Google (GOOG) on Tuesday I watched as the high beta technology names charged higher without me. I feel like a little kid who got off the bus too early and then didn't know what to do. At the very least, I did not try to fight the runaway train as many other traders engaged in the futile and unwise attempt of picking tops. Don't fight it! There is simply no purpose in trying to catch every gyration. There will likely be far more money to be made in building a list of stocks to watch and then buying on weakness if and when the market pulls in.

The market has exhibited impressive strength and it seems that this move has just been the beginning of a much larger move to the upside. In terms of health, leaders have led. This is exactly that action we want to see in the start of a new move. The S&P 500 has gained 9.5% in September alone yet, it is up only 3.0% year-to-date. The market has a week and half until Alcoa's (AA) kicks off earnings season on October 7th. I expect some slowdown in action as we near 3Q earnings reports where we can, once again, begin to obsess over the short-term results of every company.

A quick rundown of my indicators

Doctor Copper has continued powering higher demonstrating the consistent global pickup in demand for the important industrial metal. Copper is already challenging the April highs at the $3.60 level. This is as opposed to the S&P 500 which currently trades 5.8% off the April highs. Copper is still the best indicator for equities I have found for the current environment and barring a large drop in the metal I think equities will follow it higher and can even catch up should it see some consolidation at these previous highs.

The so-called Treasury "bond bubble" has fallen from the headlines as quickly as it hit the front page with 30-year Treasury bond futures now trading 3.7% off highs. I don't believe bonds were ever in a bubble as I think that is a complete mis-use of the term. Yet, I think bonds will be a particularly poor investment in the long-term as I am not nearly as pessimistic about the economic future as yields are pricing in. While interest rates likely remain low for the foreseeable future, the Fed is fueling the chase for yield outside of the bond markets. Falling bonds should be bullish for equities and perhaps the high volume flow of funds from equity mutual funds to bond funds will halt (ICI Reference).

The dollar, following a multi-month rally throughout the European debt crisis, is locked in a steep downtrend. There is still quite a ways to fall before hitting previous 2010 lows at $74.227. A weakening dollar should do nothing to stop a rally in equities and may just help it along.

Gold is an interesting story trading at all-time highs and edging up on a daily basis. Much of the investment thesis seems hyped to me with inflation very low and debt problems subdued. Overall, I think the extremely low interest rate environment we are in allows investors to sit in gold as an alternative with no fear of missing out on returns from other "safe" investments even should gold do nothing. With no return from cash, why not sit in gold as a hedge against another possible debt crisis or some unexpected jump in inflation? Though I do understand that while we do not see inflation in the CPI, we are clearly seeing commodity inflation and this should translate to higher consumer prices down the road. Finally, the Fed may be nearing accomplishment of its inflationary mission.

Brandon R. Rowley
"Chance favors the prepared mind."

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