It is the beginning of 2013 and various important technical developments occurred in recent months. Key to my analysis is the relative momentum among various asset classes. Applying the momentum principle (“what has gone up in the past, is likely to go up for some time the future”) leads to major trading ideas for the upcoming period.
A major topic was the strengthening of international markets: a look at the iShares ETFs of Emerging Markets (EEM), Europe (EZU) and China (FXI) shows that they started to outperform American stocks after the summer.
In my opinion, various underlying factors are driving the trend and could fuel momentum for a while: Europe is ahead of the US when it comes to implementing austerity measures. The Fiscal Cliff drama in December showed that America is just at the beginning of the process.
I believe Europe and Asia are somewhat linked since some key countries, especially Germany, are heavily export-oriented and any pickup in international demand will boost the German economy and therefore help the rest of Europe. Recent economic numbers from China have been encouraging. The leading ETF isn’t even China’s FXI. It is EWH, the iShares Hong Kong fund, which is trading at a two year high.
Overall, investment money has obviously been flowing from the US into international markets. I expect this theme to continue and believe various derivative plays, such as steel or large multinational US companies, can offer opportunities even with US stocks.
Another sector I’m watching is coal: stocks dramatically underperformed in 2012, but the Market Vectors Coal ETF (KOL) has stabilized in recent months and a breakout from its recent basing pattern could offer a nice entry point, in my opinion. Sentiment is extremely negative, but I believe large moves often start from an excess amount of negativity.
Some areas act strong also in the US: housing has been a big surprise in 2012 and, in my opinion, it looks like the Financial sector is taking over in 2013. At least this is what has been happening since November: while the Financials ETF (XLF) underperformed (ITB), the housing fund, for most of the year, banks recently managed to gain some strength relative to homebuilders.
Technically, I believe XLF is in a very promising position and pullbacks can offer nice entry opportunities. A bank I’m trading these days is Bank of America (BAC), which I believe to be a strong sector leader. Other interesting sub-sectors, which have been acting very strong even relative to financials are Private Equity ETF (PSP) and Broker-Dealers (IAI). American Capital (ACAS) and Goldman Sachs (GS) are my top picks to trade this theme.
On a final note, I’m extremely pleased that my combined momentum/mean-reversion trading strategy was able to outperform the S&P 500 in every single year for the last three years. Taking the momentum approach as a selection tool and then trade around these themes has obviously worked during the last three years.
Of course, themes constantly change and I cannot predict how long they will last, but I can ride them while they exist. I identified some of them earlier in this report: Europe, Asia US Financials, certain US Basic Materials and Internationals will be my area of interest in the next months.
The investments discussed are held in client accounts as of December 31. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
Any index comparisons provided in the blog are for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factors.
Certain information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. The manager believes that such statements, information and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.