A Tale Of Two Markets?

Pratish Narayanan of Bloomberg reports, Commodity Rout Worsens as Prices Tumble to Lowest Since 2002:

The rout in commodities deepened with prices touching the lowest since 2002 as the prospect of higher U.S. interest rates sent gold tumbling.

Raw materials are losing favor with investors as the dollar gains amid signals from Federal Reserve Chair Janet Yellen that the central bank may raise rates this year on the back of an improving U.S. economy. Higher borrowing costs curb the attractiveness of commodities such as gold, which doesn’t pay interest or give returns like assets including bonds and equities.

The Bloomberg Commodity Index dropped as much as 1.4 percent, falling for a fifth day in the longest stretch of declines since March. Gold futures sank to the weakest in more than five years while industrial metals, grains, Brent crude and U.S. natural gas also slid as a measure of the dollar climbed to the highest since April 13.

“Any increase in U.S. interest rates should further strengthen the dollar, prompting more fund outflows from commodities, metals and emerging-market assets,” Vattana Vongseenin, the chief executive officer of Phillip Asset Management Co. in Bangkok, said by phone.

The Bloomberg Commodity Index slid 1.3 percent to 96.2949 at 10:10 a.m. New York time, after touching 96.1913, the lowest since June 2002.

With raw materials fetching lower prices, shares of commodity producers are tumbling. The 15-member Bloomberg Intelligence Global Senior Gold Valuation Peers Index, which includes AngloGold Ashanti Ltd. and Newcrest Mining Ltd., dropped as much as 8.4 percent.

No doubt about it, commodity (GSG), energy (XLE) and especially gold shares (GLD) have all been tumbling to 52-week lows as the mighty greenback keeps surging higher (I warned you back in April not to short it!) and the China bubble is bursting.

The rout in commodities is sending commodity currencies tumbling to new lows too. Last week I discussed why the Bank of Canada is caught between a rock and a hard place and why the Canadian dollar is heading even lower. This week I found out the New Zealand dollar could hit 60 U.S. cents, with the country's central bank likely to cut interest rates soon. The Australian dollar is currently just below 74 U.S. cents and has further to fall.

What is going on out there? The slowdown in China and surging greenback due to (misguided) expectations of Fed tightening are driving commodity and energy prices lower but maybe there is something else going on out there. In particular, as I keep harping on, my fear remains that global deflation will win over global reflation.

Does this mean you can't make money in stocks? Of course not. After central banks unleashed their QE tirades, there is still plenty of liquidity to drive stocks to new highs but now more than ever, you need to be in the right stocks, sectors and country or else you won't make money and could get slaughtered.

I trade and invest only in U.S. stocks. I took that decision over two years ago and have been honing all my attention on biotech shares (IBB or XBI). I even gave you some specific biotech shares to look at back in my Outlook 2015 (click on image, as of January 5th, 2015): 

From these stocks, shares of Anacor Pharmaceuticals (ANAC) have done particularly well and now trade just over $150 (click on image below):

And who are the top institutional holders of Anacor Pharma? Who else? The usual suspects cleaning up house in biotechs -- like Baker Brothers and Fidelity -- but also some well known hedge funds like Farallon Capital Management (click on image below):

This is one reason why I track activity of top funds very closely and then use my judgment as to when to load up (like after the last biotech bubble scare back in May). And while Anacor Pharmaceuticals did well, there are plenty of other small and large biotechs that have popped in the last couple of months and breaking out to new highs (I track over 200 biotechs).

In my Outlook 2015, I also warned investors to overweight small caps (IWM), technology (QQQ or XLK) and biotech shares (IBB or XBI) and to steer clear of energy (XLE), materials (XLB) and commodities (GSG).

Importantly, while we witnessed some impressive countertrend rallies from oversold levels in energy and commodity shares, the main downtrend remains intact. Conversely, while we have seen big dips in tech and biotechs, the main uptrend remains intact.  

Also, while the rally in biotech shares has helped the NASDAQ reach record levels, it's the big tech names like Apple (AAPL), Amazon (AMZN), Google (GOOG) and Netflix (NFLX) that have all popped lately, accounting for nearly all of the gains in that tech focused index.

In some ways, it's 1999 all over again except this time the gains are concentrated in fewer and fewer names and sectors. This leaves the Fed in a tight spot. If it starts raising rates and these biotech and tech stocks keep surging higher, it will have no choice but to continue raising rates even though the U.S. economy isn't as strong and inflation expectations remain muted.

But if the Fed is too aggressive, it risks bringing about another global crisis at a time when global deflation remains the main threat. This is why I agree with the bond king Jeff Gundlach who sees a Federal Reserve that wants to raise interest rates this year but can't (see below).

Of course, now that the Greek drama has somewhat subsided, if we continue to get a summer melt-up in tech and biotech shares, the Fed might move in September to calm things down but that remains far from certain.

All I know is that when it comes to stocks, it remains a tale of two markets. Tech and biotech shares keep surging higher and energy and commodity shares keep trending lower. U.S. financials (XLF) are also doing well, making new highs, but the big gains will continue to come from tech and biotech.

Just remember, high beta stocks are very volatile, especially small cap biotech shares, so know when to buy the dips and when to sell the rips. These markets are merciless when it comes to greedy pigs.

On that note, please remember to donate and contribute to my blog via PayPal at the top right-hand side. I thank all of you who support my efforts to bring you the very best insights on pensions and investments.