It's not a secret that Emerging Markets were the big loser for a long time. Since peaking during the 2010-2011 time period, the underformance of anything EM, Mining and Natural Resources has been clear to all of us. Gold was a terrible investment, mining stocks, stocks in mining countries and others in that area had been the worst place to put your money for many years. Although still not in a full fledged parabolic rise, we've seen what appears like a healthy completion of a massive base.
To me, this is suggesting that the outperformance we've been seeing out of Emerging Markets is just getting started. The initial burst from early 2016 was more of a beta trade. This is when stocks as an asset class bottomed and the worst of the worst, emerging markets in this case, outperformed because of their higher volatility nature and the simple fact that, the harder the pounce, the more violent the bounce. We've gone nowhere the past 15 months since that initial thrust of the lows. Until now.
It's amazing how many people in this world completely ignore monthly charts. I never understood it. It's an exercise that only needs to be done once a month. It's not like eating healthy or working out that you have to do it consistently for it to work. This is 30 minutes per month! 30 minutes! 12 times a year. That's 6 hours of work that will be the most important and productive 6 hours of the entire year. Even if you have a short-term time horizon, all of these shorter-term trends come within the context of a much larger structural picture.
This weekend was our second annual Chart Summit. I still can't believe all the amazing feedback that continues to come in after this event. Thank you all from the bottom of my heart, both the presenters and the audience members. I didn't think we could make something even better than the original, but I think based on the responses, we may have actually pulled it off. Wow!
Our video production folks are hard at work putting all the videos together, but I've picked out the ones I did so I can share with all of you as soon as possible. The rest will be out this week.
It's hard to ignore a sector that is breaking out to new highs, especially when it's something that it hasn't done in a long time. Biotechnology has been a laggard for years. If we've wanted to be in healthcare, it certainly has not been in Biotech or Pharma, it's been Medical Equipment stocks. But it's 2018 and times are changing.
Today we're looking at breakouts in both the Equally-weighted Biotechnology Fund $XBI and the Cap-weighted Biotechnology Fund $IBB. Because of the very different composition of the two sector funds, we want to make sure to always watch the behavior of both. The $XBI tells a better story of the sector because it is not dominated by the big names like Amgen or Gilead. But at the same time, we're not going to just throw out the fact that $AMZN is a huge component of the Discretionary space, for example. So I think it's important to always keep an eye on both the cap-weighted and equally-weighted sector indexes.
Biotechnology has not been something you've been hearing me pound the table about for a long time. I was a huge Biotech bull in 2015, but this has not been something we've wanted to be involved with much since. The biggest reason is for the dramatic under-performance. The winning areas have been in Technology, Industrials and Financials, not Biotechnology. If we've wanted to be in healthcare at all it's been in the Medical Device and Equipment stocks, not Pharma or Biotech.
It's 2018 now and things are changing; sectors are rotating. We're seeing strength in Energy, Materials and really just Natural Resources in general. Canada and Australia breaking out finally points to strength in that area as well.
Today we're going to talk specifically about Biotechnology and if/where we want to be involved.
When you rip through 5000 charts a week you start to notice a few things. One thing that has caught my attention recently is the fact that there stocks just now breaking out of 20 year bases. These aren't some irrelevant micro-cap companies either, these are stocks that are literally representing some of the most important industries in America. It's hard to ignore these developments and I think it points to further strength in the U.S. Stock Market this year.
Stocks aren't breaking down from major tops. We saw so much of that happening throughout 2007 that it became almost impossible not to be short equities in 2008. Today we are still seeing the exact opposite: breakouts from major bases, multi-decade bases in some cases. Today I'm going to point out 3 very important stocks that are just now coming out of historic consolidations.
All-time highs across the board in Small-caps these days. Some are in shock. I personally just don't understand why stocks that are in uptrends going up is anything outside of perfectly normal? I would argue that any other result is what we should consider unusual. If the market teaches us one thing is that trends are much more likely to continue than to completely reverse.
In September I put out a post about small-caps breaking out of year long bases. If you recall, at the time, the sentiment around the market was about how high stocks were and how they could not go much further. My argument at that point was the exact opposite. Small-cap stocks had done nothing for an entire year. To suggest the stock market was too stretched was irresponsible, in my opinion. Not only did we want to be long stocks, we wanted to be "very aggressively long" equities.
It's a new year and we're already starting to see brand new trends emerging. One area that I've preferred to stay away from for a long time has been the energy and natural resource space, which just so happen to be 2 of my favorite areas to be long heading into 2018. Today I want to point out the major reversal in Natural Gas stocks that I believe will catch many by surprise as we progress into the first quarter and likely beyond.
Natural Gas stocks? When was the last time you heard me talk about those?? There is a time and a place for everything. We've discussed the relative strength in Energy stocks as a group lately and have pointed out some interesting opportunities, particularly in the Oil Refinery space, Valero especially. That has worked very well in our favor the past few months.
But moving forward I think there are some extremely favorable risk vs reward scenarios within the Natural Gas stocks as well as all of them as a group.
As many of you already know, I do a lot of work on stock markets all over the world. It's part of my weight-of-the-evidence approach, but it also gives me the opportunity to learn from investors and traders who come from completely different cultures and bring a unique perspective. How else can we learn if not by exposing ourselves to new things?
Recently I was going through my India Nifty workbook where I keep all of my notes on the India Indexes like the NIFTY50, NIFTY500, NIFTY100, NIFTY Mid-caps, etc. It's a very similar workbook to the one I keep for the United States where I include the S&P500, DJIA, Russell2000, etc. I consider all of this to be the "top" of my top/down approach to equities. We start with the indexes, work our way down to the sectors and industry groups and ultimately to the individual stock level.
We do not make end of 2018 forecasts. I think it's irresponsible to think that we have any idea of what will happen a year from now. We want to reevaluate our thesis as time goes on and new data comes in. This reevaluation process occurs consistently throughout the entire year. How else can we manage risk responsibly? Are we supposed to place our bets after New Years and just hope for the best? Come on.
Take a deep breath. Forget everything we did this year and only think about where we are today. The idea is to keep an open mind and keep every option available. If we've loved something in 2017, that doesn't mean we can't hate it in 2018. Just because we've been shorting something this year, doesn't mean we can't be buyers in the next coming quarters. We're not here to be right, we're here to make money. We can't forget that and let ego take priority over profitability. It's important to be aware of our cognitive behavior patterns and this is one of them.
