Let's get back to the general stock market. I hear a lot of griping lately about the poor breadth of the market and how this is a warning sign to not trust the strength of the market. This poor breadth is due to the rotation into growth, namely. the FANG stocks which have a large influence on the indicies. Last year when FANG type stocks were leading the charge there was the same complaining of bad breadth. Then what eventually happened? The bulk of the small stocks played catch up as the big value rotation took hold. When this happened the FANG stocks didn't collapse, they just stagnated. The end result was the market making significant new highs. This back and forth rotation from value to growth and vice versa has being going on for sometime now and so long as the in favor style is not rising solely at the expense of the out of favor style, the market can continue to make new highs.
People are trying hard to find reasons to doubt this market but aside from the high valuation argument (which hardly ever works, not to mention it's subjective), it's really hard to find them. The recovery continues with buoyant earnings trends. Short and long term interest rate levels are near rock bottom/historically low levels with the long end now trending sideways/lower for the past 3-4 months. Stress levels in corporate bond markets are non-existent. Just look at junk bond yield spreads. It's at a record low. The fizzling out of the speculative sections of the market earlier this year i.e. the SPAC, meme and hype growth stocks appears to have not infected the broad markets. This was a concern many people had, including me. There was ominous parallels to the dot com bubble bursting but from the looks of it, this fallout will end up being a sideshow given how the broader market has been able to soldier on including the NASDAQ. I pointed out before that the main difference then compared to now is that monetary and fiscal conditions were tight whereas now they are ultra loose. This gave me reason to be open minded about the fallout.
Sentiment has turned bullish recently but I wouldn't categorize it as extreme. Another concern is that we are at the peak of growth acceleration in the economy and the rate of growth is destined to come down. That's probably true, but slower growth is tolerable in the case where fixed income markets are yielding so little. So long as we don't go from growth to contraction, what you got is a market that for now at least, is in a goldilocks type situation which means that as I've said before, only mild/moderate pullbacks can be expected at this point unless something really nasty comes out of nowhere. Whenever someone comes up that creates a drop in the market ask yourself this question”is this going to result in a material change in general earnings?” If the answer is no which it typically is, then all you’re going to get are pullbacks, not bear markets. The more sentiment/positioning is bullishly lopsided the greater the pullback will be. The other thing to watch for is rising yields. The higher they get the more of a headwind and pressure builder it becomes on the market as it makes valuations of stocks less attractive.
It could be that this tranquil period in the market ends up being the calm before some sort of storms arrives but the burden of proof is on the bears. Lot's of people including me, have a worry in the back of their mind (and many in the front of their mind) that something is coming to sideswipe this market. That's actually a bullish thing as it indicates a wall of worry. But let's try to keep it real here. The SPX is up about 16% YTD. That's quite a bit and suggestive that the 2nd half of the year won't be as good.
I've had some really good moves in my portfolio. FOM turned out to be a huge winner. I have exited 60% of my position, keeping the remainder 40% come hell or high water. Given recent developments there is clear pathway for them to go from exploration company to an actual producing mining company which means another 5 x potential from here. I've also done well with my overweight in natural gas/liquid stocks PD, ARX, PEY and PRQ. These stocks, in particular the latter 2 have been significantly re-rated because they were on the brink about a year ago. Now thanks to strong gas/liquid prices they are cash flow machines trading at low multiples to cash flow even despite the big moves they've had. I believe that natural gas will be a bridge fuel used in the global quest for zero emission, electricity generation. It is however a notorious volatile commodity which has been in the doldrums for 10+ years.
I became attracted to this sector first and foremost because of the gorgeous charts. It's what I call low hanging fruit set up. Look at for example the beauty of a chart that is PRQ. It is so similar to the chart of a big winner I had in 2010 Bennet Environmental. Bennet ended up going from $0.50 to $3+ in under 6 months.
Secondly, as just as important, these stocks have improving fundamentals and low valuations after having been out of favor for so long. This gives you plenty of upside potential as there's lot of room for new people to get into the pool before it becomes too crowded.
My only dud is BKI. It had a good run to 0.70 but now back to 0.44 which is about my average cost. They have a great project but it seems like management could be weak in that they are having difficulty generating the interest of bigger players to get into the stock, unlike with FOM. They are now undertaking a financing. Let's see if the underwriter, Cannacord is able to generate some interest. They better because I'm starting to lose patience.
It's been a long time since I've been so exposed to Canadian resource related stocks. It does make me feel a little uncomfortable but the market has been telling me to get into these stocks and so I have...At some point I will harvest more gains and ride the remainder so that I can be a strong holder. I need to find the courage of my convictions to be able to do this.
