One-Third Of the Year Is Over. Now What?

Now that we're officially a third of the way through 2015, I think it's a good time to reflect on what we've seen so that we can get a better idea of where we might be headed. I've taken a little bit of time off from the blog as we held very high cash positions over the past few weeks, but I'm back and want to share some thoughts.

As far as the major U.S. Averages go, I think structurally they all look fine and are still in strong bull markets. I find it tough to argue against that. From a more tactical perspective, these consolidations over the past few months look constructive to me and I would expect breakouts to new highs at some point soon. I won't be loading up on Index ETFs or futures through; I think there are better opportunities within individual sectors.

A year like this is very frustrating for the passive investor who owns the averages and doesn't take advantage of the overwhelming dispersion we are seeing between stocks as sector rotation has ruled the land so far. Look at areas like Energy, base metals and emerging markets for example, that were left for dead, absolutely dominating recently (see here).

One of the reasons we've held large cash positions the past few weeks is because a lot of our upside targets that we had coming into April were hit a lot quicker that we expected. It's not a bad thing, but when targets are hit I think it's important to back off. I still like this emerging, energy, base metal theme going forward, but I think it's important to pick and choose our spots. The entries today are not as favorable as they were, say a month ago.

I'm happy to see the U.S. Dollar get crushed the past 6 weeks. I've never seen such consensus bullish US Dollar sentiment. That was nuts (see here). The easy money has been made on the short side here, but I think this unwind continues. The US Dollar Index itself hit some very important upside targets in mid-March (see here), so I'd bet it's going to take some time for this to unwind. I would not be buying US Dollars for anything other than just a very very short-term trade. I like the others, particularly Canadian Dollars, which I have liked since they broke out in Mid-April. But just like in the sectors mentioned before, the entry point today is no longer as favorable as it was last month.

In the bond market, I am happy to see rates mean revert while bonds get hit hard. I've liked the Long Crude Oil / Short Treasury Bond trade and still think this mean reversion has legs (see here). The ratio in the USO/TLT pair, which allows you to express this trade using ETFs, is near 0.16 up 30% from the lows in March, but still a ways away from our 0.21 target.

Bigger picture, I still think interest rates stay down. Economists continue to get this wrong and since they don't actually put money to work, they keep making the same wrong call over and over again. Meanwhile, the fed fund futures market which has been dead on this whole time continues to point to low rates. They are currently pricing in just a 46% probability of a rate hike at the late October meeting. I'm still in the camp, like I have been, that they do nothing this year.

Coal is an area that looks interesting down here. As these beat up sectors like Energy, Base Metals and Emerging Markets mean revert to the upside, Coal has participated a little bit but not as much as the others. I think we can see significant upside from some of these coal stocks. We're paying close attention to this space entering the middle third of the year.

The Agribusiness sector has really caught my eye. When you look at a sector ETF like $MOO which seeks to track to Market Vectors Global Agribusiness Index, it's hard to find a nicer base out there. Look at this index on multiple timeframes and tell me that a breakout isn't going to be extremely powerful. The only thing that has held me back is the flat 200 day and 200 week moving averages. If these smoothing mechanisms can start to slope up, we want to be all over this space, particularly from a structural perspective. This index is loaded up in agricultural stocks like John Deere, Agrium, Monstanto, Potash, etc. This sector has my attention.

Globally, I'd say that a big theme is countries hitting our upside targets. When you look at China, Japan, Hong Kong, Philippines, Malaysia, Australia and Vietnam, they have already reached our objectives. So at this point, it's hard to find good entries globally. I think a lot of easy money has been made around the world, so it's hard to put new money to work here. I'd say one area we are looking at closely that has yet to take off on us is Taiwan. We'll be watching these guys closely this month as their long-term smoothing mechanisms begin to slope up.

Finally Natural Gas is an interesting area we want to watch. We are coming off bearish extremes in sentiment that we haven't seen since 2002. Meanwhile, the Commercial Hedgers, who we consider to be "the smart money", has the most net long exposure that we've ever seen. These factors accompanied by bullish momentum divergences on multiple timeframes point to a mean reversion here to around $3.40. With prices currently under $2.80, this risk/reward favors the bulls. We're not in but will be looking for entry points in the coming weeks.

That's what's going on in my head.

What are you guys thinking here?

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