Yesterday we were talking about the new rotational spin of the U.S. market, as groups have rotated into and out of favor at breathtaking speed of late.
Where will the wheel spin next? As readers of my Trader’s Advantage newsletter know already, I believe the strongest rotation now is into basic materials and energy, which is why emerging markets and states with strong commodity export businesses have done well. That’s why stocks in Brazil, Australia, South Africa and the Republic of Texas have been shining.
Oil and gas stocks are enjoying their best rally since they collapsed in July last year, with one-time favorites like Stone Energy (SGY) sinking from a high of $73 to a low of $1.55 despite ownership of terrific hard asset and now levitating again upwards of $7.
The same is happening in coal, as big U.S. producers like Arch Coal (ACI) went from $76 last June to $11 in March, and has just in the last couple of weeks risen up off a nice, long base to a six-month high of $19.
Profit From the Basic Materials Surge Via Emerging Markets
The double-barreled way to play the basic materials surge is via emerging markets. A great example is Petrobras (PBR), the biggest stock in Brazil, which fell from $75 in June 2008 to $14.50 in November and has risen steadily since to $40.
Or look at Brazilian forestry products company like Aracruz Cellular (ARA). It fell from $90 in June 2008 to $5.30 in March, and has since surged recently off a long base to around $18.
This kind of rotation is the norm in the equity markets, and it was just missing in the second half of last year. Now that it’s back, we need to recognize that it can certainly reverse again — which is why we need to watch these groups like a hawk.
If you want to see what happens to groups that lose favor in these kinds of rotations, just check out the big beverage and snack makers, like Coca-Cola (KO) and Pepsico (PEP), which have been stuck in idle for eight months. Same for big telecom, like AT&T (T), and personal products makers, like Colgate-Palmolive (CL) — both stuck in a rut.
Other Sectors Surging Now
With limited money around for investment purposes, money is rolling quickly into new groups in rotation. Some other groups that are surging now but gaining less attention than energy are casinos, publishing, steel, investment banks, and, here’s a shocker: tires.
Some charts to check out on your own: Las Vegas Sands (LVS), Gannett (GCI), AK Steel (AKS) and Goodyear Tire (GT). Cooper Tire (CTB), below, has nearly tripled in the last two months as the worst-case scenario for U.S. auto makers has been taken off the table. Now that’s some serious rotation.
In summary, for the past month and a half, I’ve been urging you to take this rally seriously because regression to the mean is the most common event in the stock market. When stocks go way below their mean, as they did in early March this year, they have a lot farther to travel to get back to it. Now that has nearly concluded, as stocks are just about back to their 200-day average.
The broad market may well overshoot, and get to the 1,000 area of the S&P 500, but it’s unlikely. Mean regression is a powerful event but to go farther there must be more than green shoots indicating stabilization for the economy — there needs to be indications of real growth. The next phase of the broad U.S. market is likely a series of mild setbacks and rallies that set a new stabilization zone, or range from around 750 to 950.
To learn how to play the sector rotations as that range emerges, check out my Trader’s Advantage newsletter.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
