In part I of this report we talked about what commodities and transports where doing in relation to each other. Here in Part II, we show you in detail what we expect to take place.
This chart highlights our Custom Smart Cash Index (in blue) as well as the CBOE Commodity Index pricing levels (red). This data goes all the way back to 2012 and highlights a number of key pricing rotations. First, we can see that commodities have been decreasing in total value from 2012 through mid 2017. We can also identify a key support level that was established in the commodities index near the beginning of 2016 – coming just a month or so before the bottom in the Smart Cash Index.
We believe this key bottom in both the commodities and Smart Cash indices reflect a dramatic pricing shift that took place at that point in time. Although commodities have yet to rally beyond their upper high ranges, we can see the Smart Cash Index rallied to new all-time highs. The rally that started near the end of 2016 in the Smart Cash Index was likely the result of a capital shift, which we have discussed extensively in the past. With commodity prices staying historically low and an increase in economic optimism, capital shifted away from commodity-based sectors and into technology and biotech. Now it appears this rally has run its course and a new capital shift is taking place.
Until commodities begin to break out of the downward price channels highlighted on this chart, global capital will be searching for two primary objectives: safety and hedged returns. By this, we mean to say that global capital and investment will seek out strong blue chip and mid-cap performers that can produce safety in growth, dividends and hedge against currency swings or further-eroding commodity price levels. Think of this as a move to key elements supporting the global economies.
Watch heavy equipment, support services and retailers, tool suppliers and mid-level equipment suppliers, transportation services for these items and the repair parts and services to keep these tools running efficiently. Human services, labor, labor services, medical services and entertainment services are likely to do well over the next 12-24 months. In an economy where commodity prices are relatively low and transportation and capital are flowing quite well, one can easily see that capital will seek out and identify the strongest opportunity for safety and growth as sectors continue to shift. After a massive rally in technology and bio-tech, we believe a continued shift toward blue- and mid-caps is taking place right now. Technology and bio-tech will likely find some support in the near future and become opportunistic investments. But right now, we believe global investors are focusing on different targets to hedge the risks that are associated with certain technology stocks.
In closing, our research highlights that commodities are not increasing as one would expect in an expanding global market/economy. We believe this is one core factor that will continue to drive a capital shift toward opportunity and performance in the blue- and mid-caps. Investors will re-enter the technology and bio-tech sectors when pricing levels become more opportunistic – at some point in the future. This means there is a strong likelihood that US and global blue chips, banks, industrial supply, basic materials and human services (entertainment, basic human essentials, regional human services and utilities) will continue to perform well.
The US and the global economy is growing, just not as one would expect in a “total growth” environment. We believe the global economy has shifted to support fundamental growth elements that are related more closely to the types of industry and market sectors that support the fundamental growth components. We've discussed our theory that global economies operate in a “growth or protection mode” many times before. We believe the current global economic stance is more in tune with moderate growth while still being overly protective. Watch commodities and the transportation index for signs that the global economy has entered a larger growth phase and for more opportunity of a broader capital shift.
This concludes our two-part series on how we identify market opportunities. Analysis like this has allowed us to generate substantial profits in the past 30 days with UGAZ 30%, NIO 21.6%, ROKU 18% and GDXJ 10.5%.