Are you scared of new highs?
We'll be discussing everything you need to know heading into the year on Tonight's Live Conference Call. This is the first of the year so you don't want to miss it! Premium Members can register here if you haven't already.
We'll get going Live @ 6PM ET. And if you can't make it live, no need to worry, we'll have the full video and all the slides to download available shortly after the completion of the call. But it's always better to be there live so you can ask questions and we can discuss what's on your mind!
In the meantime, here's some food for thought.
This chart represents the most old school trend following strategy that I know. It's very simple. You take a 10-month Exponential Moving Average of the S&P500, and at the end of each month if S&Ps close above the EMA, then you own $SPY. If the index closes below the EMA then you own Treasury Bonds $TLT.
This strategy has kept you long S&Ps since May 2020:
The thing about these trend following systems is that you're not going to sell at the top and you're certainly not going to buy at the lows, but it helps you take big chunks along the way.
It also increases the returns and lowers volatility. And you'd be surprised to know that there are much fewer transactions than you'd expect. Take it back to the 1950s you'll see.
I wanted to share this one for some of you new comers. You guys who have been around markets for a while are probably familiar with some sort of version of this strategy above.
Hopefully this inspires you to create your own system. There's no right or wrong way to do it. But I think if you're increasing returns and lowering volatility, there's probably value there.
Let me know what you come up with!
Meanwhile, it's been the U.S. that's been leading the charge in equities around the globe. That's no secret.
Any diversification away from the United States has proven to be a mistake.
But how long can that last?
This chart comes from J.P. Morgan showing the relative performance periods between EAFE and the United States.
Keep in mind that EAFE represents developed nations outside of North America, driven mostly by Japan, Europe, UK and Australia. You can check out the EAFE ETF fact sheet here.
After over 14 years of outperformance, is it time for some rotation?
This has been the longest period of U.S. outperformance that we've ever seen.
And it's an interesting thing as we enter the new year with all of those countries leading EAFE coming out of monster bases. Let's quickly go over them in order:
Japan might be the biggest base in the world:
And the base in Europe is pretty humongous on its own:
These are multi-decade bases in some of the most important countries in the world.
Take a look at London's FTSE 350:
And finally Australia. Bases, bases and more bases:
So maybe the U.S. can continue to outperform. That's certainly possible. But it doesn't mean that these other countries need to struggle. They're ripe for strong years when you zoom out and take a look at the size of those bases.
"The bigger the base, the higher in space", is how I learned it!
And while those developed markets mentioned above are breaking out of historic bases, we're just not seeing that in Emerging Markets just yet:
First of all, this is not a bearish setup. To me, we're seeing consolidation below overhead supply in this index. Second of all, China is a major component of $EEM and China has destroyed the value of all their largest stocks.
When you look at Mexico, India and Taiwan for example, they look much stronger than places like China or Brazil, which have gotten crushed.
So not all emerging markets are created equally.
On top of that, if we finally get that weaker US Dollar, that should be the catalyst to really help out global equities. We've discussed the positioning right now, which suggests the smart money is, in fact, betting very aggressively on a weaker Dollar.
If Commercial Hedgers are right, then you're looking at one of the most bullish catalysts for stocks and other risk assets, in my opinion.
So how are we taking advantage of the situation?
I think we come into the year buying stocks.
Zooming out, Facebook is still in a strong uptrend. And there's a lot of pessimism circling around this name. I like that combination.
If we're above 320 in $FB I like it long with 50% of upside.
Also in the Agriculture space, the AgriBusiness ETF $MOO continues to press up against all-time highs. I think a breakout is imminent here:
One of the largest components of $MOO is John Deere $DE.
This is one of the strongest uptrends in the market and I think we can own it right here.
As long as $DE is above 320 I think it's a long with 50% of upside as well.
The $DE and $FB trades are very similar, with the same prices. Funny how the market works.
Premium Members can check out our favorite trades heading into 2021 here.
Also make sure to check out Micron, which popped up on last week's Under The Hood Report.
Speaking of monster bases....
If we're above those former highs and $MU completes this base, then sky's the limit.
They're buying risk assets. They're not buying the defensive ones. Look at the buying pressure in stocks and the fact that no one wanted bonds or those silly rocks in 2021:
I think you stick with what's working!
We'll be discussing all of this tonight.
See you then.
Make sure to register if you haven't already.
JC