This week I was in New York City working on some really cool things that I'll be announcing next quarter. It has been an incredible year and I think 2018 is going to somehow be even better! While I was in town, I swung by the Nasdaq Marketsite to chat with my friends over at BNN in Canada. They wanted me to talk about my thoughts on Bitcoin (of course), precious metals and U.S. equities.
It was a quick hit but I think I laid out some really interesting opportunities with very well defined risk parameters. As long as the potential reward is exponentially greater than the risk and the trend is on our side, I see little reason not to be all over these. There have been some very powerful trends in these markets over the past few years that I think continue into 2018.
What often gets lost in the shuffle between whether or not to buy emerging market stocks is the fact that there are several important components within the group. Emerging markets aren't just one thing. They are a collection of major markets around the world that are not yet fully developed.
Today we're talking about the structural breakout we're seeing in shares of the India Exchange Traded Fund $INDY. Look at the former highs in 2011 that were tested again in early 2015. This year prices were finally able to break out above that key resistance to begin a new leg higher. These are characteristics of uptrends, not downtrends. The weekly bar chart tells the story well:
In the world we live in today, it's hard to find someone that is excited about Consumer Staples. "Why, do they have a new digital coin out?" is what you might hear. While some people treat the the volatility in certain asset classes as something to be distracted about, we just look at bitcoin and its fellow coins as another investing vehicle. Consumer Staples have just as important of a role in our process. Today, I want to talk about the breakout we've seen this week in the Equally-weighted Consumer Staples Index Fund.
The way I learned it, the bigger the base, the higher in space! We want to buy breakouts from markets that have been range-bound for a while. Consumer Staples are one of them.
I have a workbook of charts where I keep the entire list of stocks in the Consumer Staples Sector. With the Equally-weighted Consumer Staples Index breaking out of a multi-year base, we want to find the stocks that are going to lead this sector higher.
Here is a list of the ones that stand out which are showing strength and a risk vs reward skewed in favor of the bulls following the longer-term and shorter-term uptrend in Consumer Staples:
We look to Financials as a leader. We've never had a bull market in US Stocks without participation from the banks. They don't necessarily need to be leading but they do need to participate. When we see the S&P Financials Index going out at new 10-year weekly closing highs, it's hard to be bearish stocks as an asset class. This has been a big part of the aggressively bullish case I've been making since the summer of 2016. Meanwhile, the Broker Dealers Index is holding above its former all-time highs from 2007 and just beginning a new leg higher.
These are not bearish characteristics for stocks as an asset class.
There is a lot to be said for taking the time to analyze all of the stocks in an index. I find that process to be much more rewarding than obsessing over every 50 basis point move in the index itself. I've written in the past about how I think the Dow Jones Industrial Average is underrated. You can go through all 500 stocks in the S&P500 or just 30 of them in the DJIA and you'll get a quick snapshot of the health of the market. If there are more good ones than bad ones, it's probably not a downtrend in the index. If there are more bad stocks than good ones, it's likely the index will follow them lower as well.
Sector rotation is the lifeblood of every bull market. When one sector reaches a temporary peak, another one takes over the charge while the former leaders consolidate. We have seen this happen throughout the past 2 years in a very consistent way. Today we're taking a look at all of the individual sectors and the industry groups within them to find the areas of strength and weakness moving forward.
One thing that often gets forgotten is that we don't live in a vacuum. Life in the market is not just about absolute performance, but about how assets behave relative to their peers. The stock market isn't the biggest game in town, it's the bond market. But let's not forget about metals either. When stocks are in bull markets, they're not just going up as a group, they are also outperforming the alternatives.
Today we're taking a look at stocks, not just on their own, but relative to the other assets. We know that on their own stocks are making new all-time highs. This is happening all over the world. Stocks in the U.S. aren't up because of what's happening in New York or Washington DC. Stocks in the U.S. are up because stocks all over the world are going up, both in developed and emerging markets, despite of what is happening in New York and Washington DC.
As I continue to go through all of the stocks in my chartbook, I thought it would be good to post some of the more interesting ones. I've tried my best to identify only the stocks showing both relative strength and momentum, but that also present a favorable risk vs reward opportunity. This helps makes this portion of the analysis more actionable. You can see the more global macro context here, and you can see my list of Technology stocks I like here.
In this post, we are focusing only on the Healthcare Sector and the specific industries within it.
We're here to make money in the market aren't we? Some people want to gossip about tax cuts or who the next fed chair might be. I personally see no absolutely value in this sort of data. In fact, I believe it does more harm than good.
We want to turn the TV off, shut down the twitters and social medias and focus on the only thing that matters: price. The first thing we do is identify what the current market environment looks like. In this process we include stock market indexes in both the U.S. and all over the world, Commodities, Interest Rates and Currencies. Once we have laid out exactly what sort of environment we're in, then we can dig down to the individual sector level and ultimately to stock specific ideas. But all of this must be done after we've identified what sort of environment we're currently in.
Click here to see what the current environment is like today:
The noise machines are getting louder these days with Junk Bond Funds falling to levels not seen since March. You have the frustrated stock market bears data mining the heck out of everything trying to find something to justify their losing positions, or lack of winning ones in many cases. Remember it's not just about the money they've lost trying to short the stock market, it's the overwhelming amount of opportunity cost already incurred by simply not being long enough. It's double the frustration. I've noticed these bears turning to the bond market for guidance.
While the yield curve continues to fall, we've actually found that historically the stock market does the best when the yield curve is exactly where it is today (2s-10s specifically). But today I want to talk about the spreads between Junk Bonds and Government Bonds. When the stock market is showing plenty of evidence of risk appetite, we want to see the bond market confirming that as well, not diverging from it.
As you guys know I've been pounding the table bullish of stocks for a long time. Not just U.S. stocks, but globally including both developed and emerging markets. This aggressively long approach is nothing new to us. Along the way, however, I've tried to point out some of the things we've been watching closely as a warning that a bullish thesis is most likely wrong. Again, it's not so much about how high we think a stock or sector or index can go, but at what point are we wrong? What's the risk? is the more most important question.
