In Part I of this report we talked about and showed you 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 final chart highlights our Custom Smart Cash Index (in BLUE) as well as the CBOE Commodity Index pricing levels (in 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 till mid-2017. We can also identify a key support level that was established in the Commodities Index near the beginning of 2016 – coinciding just a month or so before the bottom in the Smart Cash Index.
We believe this Key Bottom in both the Commodities Index and the Smart Cash Index reflect a dramatic pricing shift that took place at that point in time. Although Commodities have yet to rally beyond upper high ranges, we can see the Smart Cash Index rallied to incredible 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” that 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 sectors”. 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 we’ve highlighted on this last 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 be seeking 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”.
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 is flowing quite well, one could easily identify 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 towards Blue Chips 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” eventually. 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 Chips and Mid-Caps. Global investors will re-enter the Technology and Biotech sectors when pricing levels become more opportunistic – at some point in the future. This means we have a very strong likelihood of the 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 the 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 of when the global economy enters a larger growth phase and when more opportunity for a broader capital shift will take place.
This concludes this two-part series and how we identify market opportunities for us to trade. Analysis like this has allowed us to generate substantial profits in the past 30 days with UGAZ 30%, NIO 21.6%, ROKU 18%, GDXJ 10.5%.
If you want to learn how we can help you find success throughout this shifting market and throughout 2019 and beyond, then visit www.TheTechnicalTraders.com
Chris Vermeulen
Technical Traders Ltd.