A First-Half Review Of The Markets

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Includes: AAPL, AMZN, ASHR, ATUS, CDNS, COLD, CVX, DIA, DOCU, EEM, EFA, ELAN, EQH, FB, FCX, FFTY, FXI, GDX, GDXJ, GLD, GOLD, GOOGL, IPO, IWD, IWF, IWM, IWN, IWO, IYR, KL, LLY, MGK, MSFT, NEM, NFLX, NOW, OIH, OKTA, PAGS, PAYC, PYPL, QQQ, SBLK, SCCO, SLB, SLV, SPOT, SPY, TEAM, TLT, TWTR, UBER, UNG, UPLD, UUP, VEEV, VICI, XLE, XOM, XOP
by: KCI Research Ltd.
Summary

30 different market indexes and ETFs are ranked by their year-to-date performance to show what is outperforming, and what is under-performing.

Growth equities are dominating performance, once again, in 2019.

Growth equities have outperformed for the past 12 years.

Where are the value opportunities today?  When will the capital rotation from growth to value occur?

Excerpted from an article published June 30, 2019.

Introduction

This is a entry in a regular series that looks at monthly price action, via monthly charts, to present a longer-term perspective for a selected number of market barometers.

Right now, we are now monitoring a selected list of 30 indexes and baskets of equities on a monthly basis to try to improve our big picture view of the market.

The story of 2019, thus far, and really the story of the past decade, has been the dominance of growth equities, which have surged higher post the 2015/2016 market correction, after a brief capital rotation in 2016, from which we benefited greatly, and which have dominated the past 12 years of price action in U.S. equity markets. It is not an exaggeration to say that the current dominant run of growth over value exceeds what we witnessed from 1990-2000.

Year-To-Date Performance Rankings Through June 2019

1. There has been a renaissance in the U.S. equity markets in 2019, and appropriately, this renaissance has been led by the surging performance of initial public offerings, traditionally, some of the most speculative growth fare. On this note, the Renaissance IPO ETF (IPO) is up 36.1% year-to-date through June 30, 2019, as shown in the monthly chart below.

(Source: Author, StockCharts)

Looking at the chart above, the Renaissance IPO ETF lost roughly a quarter of its value during the final three months of 2018, yet much like the broader U.S. equity markets, the IPO ETF has surged higher for 5 of the first 6 months of 2019.

Leading the charge, the top-ten holdings of IPO, which are roughly 43% of the ETF, are all higher YTD in 2019.

Somewhat surprisingly, at least to my eyes, Elanco Animal Health (ELAN), a spin-off from Eli Lilly (LLY), is the largest holding of IPO, at 6.6% of assets, and ELAN shares are up 7.2% in 2019.

Okta Inc. (OKTA), a San-Francisco based cloud company, is the second largest holding of IPO, with 6.4% of fund assets, and shares of OKTA, have gained 93.6% in 2019.

Going down the list of the top-ten holdings of IPO, VICI Properties (OTC:VICI), the third largest holding at 5.8% of assets, have risen 20.5%, Altice USA (ATUS), the fourth largest holding at 4.9% of IPO's assets, has risen 47.4%, Spotify Technology (SPOT) shares have risen 28.8% in 2019, Uber Technologies (UBER), after a rough start out of the IPO gate, is now higher by 3.1% in 2019, PaySegoro Digital Ltd. (PAGS), a Brazilian based internet finance company, has seen its shares gain 108.1% in 2019, Americold Realty Trust (COLD), the eighth largest holding of IPO at 3.2% of fund assets, has seen its shares rise by 28.6% in 2019, AXA Equitable Holdings (EQH) shares have gained 27.4% in 2019, and DocuSign (DOCU), the tenth-largest holding in IPO, has seen its shares rise 24.0% YTD in 2019.

2. After finishing last year with a 2018 calendar loss of -24.8%, $WTIC crude oil prices gained 9.3% in June, recovering partially from a sharp decline in May of 2019, bringing $WTIC's YTD percentage gain in 2019 to 28.8%.

(Source: Author, StockCharts)

From my perspective, oil prices are still in an secular uptrend after their 2016 lows, though this move higher has been volatile, and so far, it has not been accompanied by a concurrent rise in energy equities (more to come on this later in this article). Additionally, for all its criticism, $WTIC prices have out-gained $BRENT crude oil prices by a healthy margin in 2019.

3. Sliding into third place in our customized list of performance barometers, the Deutsche X-trackers Harvest CSI 300 China A-Shares ETF (ASHR) rose 7.8% in June of 2019, posting its fifth monthly gain in the past six months, similar to the prevailing price trends in both IPO and $WTIC crude oil.

(Source: Author, StockCharts)

Continued strength in mainland Chinese shares is a good sign for a sustainable turn higher in global growth.

4. The Innovator IBD 50 Fund (FFTY), which is dominated by technology oriented companies, gained 6.2% in 2019, and is up 20.9% YTD in 2019.

(Source: Author, StockCharts)

The top-ten holdings of FFTY are Veeva Systems (VEEV), at 3.8% of assets, Kirkland Lake Gold (KL), at 3.7% of assets, PagSeguro Digital, which was in the IPO ETF, at 3.7% of assets, Atlassian Corporation (TEAM), at 3.6% of assets, Paycom Software (PAYC) at 3.6% of assets, Upland Software (UPLD) at 3.5% of assets, Cadence Design Systems (CDNS) at 3.5% of assets, PayPal Holdings Inc (PYPL) at 3.5% of assets, ServiceNow (NOW) at 3.4% of assets, and Twitter (TWTR), at 3.4% of assets.

Year-to-date in 2019, VEEV shares are up 81.5%, KL shares are up 64.8%, PAGS shares are up 108.1%, TEAM shares are up 47.0%, PAYC shares are up 85.2%, UPLD shares are up 67.5%, CDNS shares are up 62.9%, PYPL shares are up 36.3%, NOW shares are up 54.2%, and TWTR shares are higher by 21.4% in 2019.

Clearly, as the performance of the top-ten equities YTD in 2019 of FFTY shows, the IBD growth playbook is in-favor right now, and this has been the case for the much of the past decade.

5. Highlighting the growth out-performance in 2019, and really the past decade too, the Invesco QQQ Trust (QQQ) gained 7.6% in the month of June, bringing its YTD gain through June 30th, 2019,, to 21.5%.

(Source: Author, StockCharts)

When trying to illustrate the performance of FANG, I looked at the Vanguard Mega Cap Growth ETF (MGK), where Microsoft (MSFT), Apple (AAPL), Amazon (AMZN), Alphabet (GOOGL), and Facebook (FB) comprised 35% of assets of MGK.

Comparatively, these five companies make of 45% of QQQ, so QQQ is a better proxy for FAANG than MGK.

Year-to-date in 2019, MSFT shares are up 32.9%, AAPL shares are higher by 26.5%, AMZN shares are higher by 26.1%, GOOGL shares are higher by 3.6%, FB shares are higher by 47.2%, and Netflix (NFLX) shares are higher by 37.2% (for reference SPY is higher by 18.3%).

From a bigger picture perspective, it has been a decade of growth, really longer (over 12 years of out-performance) and QQQ is still above its 10-month EMA.

Eventually, growth, and large-cap growth, as represented by QQQ, is destined to decline in a historic reversion-to-the-mean trade as value outperforms growth.

Personally, I think this capital rotation will be bigger than what we witnessed in 2000-2002, however we are not there yet, as passive and ETF inflows have continued to feed the market beast that we will ultimately rue creating.

6. After outperforming in the fourth quarter of 2018, the VanEck Vectors Gold Miners ETF (GDX) took a breather over the past four months, before surging higher by 18.4% in June of 2019, to bring its YTD gains to 21.2%.

(Source: Author, StockCharts)

The two largest components of the VanEck Vectors Gold Miners ETF, Newmont (NEM), and Barrick (GOLD), which have both under-performed GDX YTD, rising 14.7% and 16.9%, respectively, perked up in June.

Newmont shares gained 16.7% in June, still under-performing GDX's 18.4% June gain, but a healthy gain nonetheless. Barrick shares roared higher in June, registering a gain of 27.0%.

Bigger picture, my thoughts remain the same from February, and from the fall of 2018, specifically:

I continue to believe that precious metals equities had a significant bottom in late 2015/early 2016, and I think there is a reasonable, to a very good chance, that precious metals equities will lead the next wave of the commodity equity rally higher.

Adding to the narrative, I have previously mentioned that Barrick Gold (GOLD), was a precious metals equity to watch, and that GOLD remained significantly undervalued from my vantage point.

Thus, the resurgence in GOLD shares has been a pleasant sign, and I think there is more room to run. Specifically, I have a $30 intrinsic fair value target on GOLD shares, and this intrinsic fair value will move up as precious metals prices move higher, with leverage to the upside.

7. A new addition to this coverage piece is the iShares Russell 1000 Growth ETF (IWF), which I have brought in to show the divergence between growth and value.

(Source: Author, StockCharts)

IWF shows that large-cap growth is outperforming large-cap value in 2019, though IWF is trailing QQQ, which shows that the largest growth stocks, which make up 45% of QQQ, are outperforming (see above commentary on QQQ).

8. $BRENT oil checks in eighth place in our customized YTD performance rankings, sporting a YTD gain of 20.3%, which included a 4.4% gain in June of 2019.

(Source: Author, StockCharts)

Somewhat surprisingly, $BRENT oil is trailing $WTIC oil's gain YTD, with $WTIC prices rising 28.8% in 2019, and $BRENT oil rising 20.3% YTD. This performance gap widened in June, with $WTIC gaining 9.3%, and $BRENT gaining 4.4%.

9. Small-cap growth is ahead of small-cap value in 2019, with the iShares Russell 2000 Growth ETF (IWO) gaining 20.0% YTD, after a 7.3% gain in June of 2019.

(Source: Author, StockCharts)

Interestingly, with small-cap stocks under-performing their large-cap counterparts by a healthy amount in 2019, there is only a slight performance gap between the Russell 2000 Growth ETF (up 20.0% YTD) and the Russell 1000 Growth ETF (up 20.9% YTD).

10. The SPDR S&P 500 Index ETF (SPY) gained 7.0% in June of 2019, bringing its YTD gain June 30th, 2019 to 18.3%.

(Source: Author, StockCharts)

SPY has made new all-time highs in 2019, as passive fund flows, and trend following fund flows, provide an autopilot boost to the U.S. stock market, which has really been the narrative over the past decade.

Eventually, this narrative will come to an end, and when closet indexing money is included in fund flows, we are probably closer than many market participants think on this front.

Bigger picture, I think the opportunity in the equity market is outside of SPY, specifically in out-of-favor commodity equities, and in out-of-favor international equities, though with its June 2019 close back above its 10-month EMA, which comes after the two-month January/February close above its 10-month EMA, trend followers are probably back in on the long side on SPY (after being whipsawed a couple of times), at least for the time being.

11. REITs have been a consistent performer in 2019, only sliding marginally in May of 2019, when the broader U.S. market stumbled much more steeply. Year-to-date in 2019, the iShares U.S Real Estate ETF (IYR) is now up 18.2% after gaining 1.3% in June, right in-line with the S&P 500 Index.

(Source: Author, StockCharts)

IYR has been boosted by lower long-term interest rates, though I believe we are in the late innings of bull market in bonds.

Bigger picture, REITs have outperformed for almost 20 years, and while they were exceptionally cheap in 1999/2000, they are exceptionally expensive today, partly because they are so in-favor in the current investing climate, where low interest rates, which have dominated the investing landscape the past decade, are widely expected to prevail for the foreseeable future.

While this could turn out to be true, I have my doubts since almost everyone believes in the "lower for longer" narrative, and, real estate securities are very expensive as our customized valuation tables, which feature 12 REITs to highlight how expensive these companies are, currently, show.

12. The iShares Russell 2000 ETF (IWM), a barometer of smaller capitalization equities, rose 7.0% in June, right in-line with the gain in SPY. Year-to-date in 2019, IWM is up 16.9%, slightly trailing the 18.3% gain in SPY.

(Source: Author, StockCharts)

Looking at the chart above, IWM still remains roughly 9.0% below its 2018 highs, which were the all-time highs in IWM, where SPY is at new all-time highs, so there has been a clear divergence between the performance of large-cap U.S. equities, and smaller-cap U.S. equities.

Bigger picture, it is my opinion that there is going to be a tremendous performance diversion in smaller capitalization equities in the second half of 2019, with the out-of-favor equities having the most return potential.

13. The iShares Russell 1000 Value ETF (IWD) gained 7.0% in June, actually outperforming the iShares Russell 1000 Growth ETF, which gained 6.5% in June.

(Source: Author, StockCharts)

Despite its out-performance in June, year-to-date through June 30th, 2019, the iShares Russell 1000 Value ETF is up 15.8%, while the iShares Russell 1000 Growth ETF is higher by 20.9%, so growth is clearly outperforming value. This divergence increases the farther you go up the growth spectrum, and the farther you go down the deep value spectrum.

14. In a bit of happen chance, the VanEck Vectors Junior Gold Miners ETF (GDXJ) gained 18.4% in June, the exact same gain (down to two decimal places) as its larger-cap peer, GDX. Year-to-date in 2019, GDXJ is up 15.7%.

(Source: Author, StockCharts)

GDXJ continues to look constructive from a technical picture, however, GDXJ needs to start outperforming GDX, which is up 21.2% YTD, outpacing the 15.7% gain of GDXJ.

Bigger picture, with the U.S. Dollar Index at a crossroads (another thing we will get to later), everything appears to be in gear for a significant precious metals equity rally, which historically, including the precious metals equity rally in late 2008/early 2009 and late 2015/early 2016, has preceded major commodity equity rallies.

15. The venerable Dow Jones Industrial Average (DIA) sits in 15th place in our performance rankings, rising 7.4% in June to bring its YTD gain to 15.3%, which is roughly 3.0% below SPY's 18.3% YTD gain.

(Source: Author, StockCharts)

Looking at the chart above, the Dow Jones Industrial Average looks remarkably similar to SPY, and this makes sense, since it has been perhaps the best decade in modern market history for big business.

The next decade is likely to be different, with wage pressures and commodity input costs both rising (after declining for almost all of the past decade), which will hurt historically high record profit margins, particularly in the largest U.S. businesses.

16. International developed market equities, as measured by the iShares MSCI EAFE ETF (EFA), advanced 5.9% in June of 2019, trailing the gains of QQQ, DIA and SPY, which gained 7.6%, 7.4%, and 7.0%, respectively. Year-to-date in 2019, EFA is higher by 14.2%.

(Source: Author, StockCharts)

Similar to emerging market equities, which we will discuss later, the technical bigger picture for developed international market equities, despite severe relative under-performance versus the United States over the past decade, is not as dire a picture as some would paint, even after a very difficult 2018. The key question now, is whether there is a sustained rotation from the U.S. into international equities?

As I said the last several months, I think the laggards in this bull market have a high probability of become the leaders.

The only question is timing.

17. The iShares Russell 2000 Value ETF (IWN) checks in at 17th place in our customized year-to-date performance rankings, following a 6.1% gain in June, that brought its YTD gain to 13.1%.

(Source: Author, StockCharts)

The iShares Russell 2000 Value ETF has trailed the iShares Russell 2000 Growth ETF in both June 2019 performance (6.1% to 7.3%), and YTD performance (13.1% to 20.0%).

Again, I think this under-performance between growth and value is actually much deeper the further you dig into momentum growth, and deep value, and this delineation is the root of future historic opportunity, in my opinion.

18. Large-cap energy stocks, as measured by the Energy Select Sector SPDR Fund (XLE), gained 9.4% in June of 2019, even outpacing the gain of $WTIC crude oil, which gained 9.3% in June of 2019. Year-to-date in 2019, XLE is up 13.0% year-to-date.

(Source: Author, StockCharts)

Even though XLE has gained 13.0% YTD, it has under-performed both $WTIC and $BRENT, which are up 28.8%, and 20.3%, YTD respectively.

Additionally, after losing -18.2% during calendar 2018, XLE has bounced back in 2019, importantly holding above its 2016 lows, while the oil service ETF, which we will get to later, did not hold above its 2016 lows.

Exxon Mobil (XOM), and Chevron (CVX), which are the two largest components of the XLE, finished higher by 8.3%, and 9.3%, in June of 2019. Year-to-date in 2019, XOM is higher by 14.9%, and 16.7%.

Bigger picture, XLE looks better than OIH technically, and it is much closer to its highs than XOP. While this is a positive relative technical position for XLE, I think there is more opportunity in the smaller capitalization energy companies, which remain more out-of-favor, as they are not part of the popular indexes and ETF strategies, while XOM and CVX regularly appear in these investment products, which has bid up their prices on a relative basis.

19. Emerging market equities are also an area of relative and absolute opportunity, in my opinion, after significantly under-performing the U.S. broad market indices over the past decade.

Year-to-date in 2019, the iShares MSCI Emerging Market ETF (EEM) has bounced back with a gain of 10.7%, including a gain of 6.2% in June, though much like smaller capitalization energy stocks, which have severely lagged the performance of crude oil year-to-date in 2019, EEM is still under-performing the major U.S. equity indices.

(Source: Author, StockCharts)

The bigger picture chart of EEM above shows that the downtrend dating to the beginning of 2018 was broken in January. An additional positive is that EEM closed above its 10-month EMA in June, though there have been several whipsaw signals with this signal, similar to the same whipsaws in this signal for the S&P 500 Index.

From a shorter-term perspective, EEM ended its streak of relative out-performance, after outperforming the major U.S. equity benchmarks in January of 2019, December of 2018, and November of 2018.

20. After finishing down -13.3% in calendar 2018 (SPY declined -4.6% in 2018), the iShares China Large-Cap ETF (FXI) gained 7.0% in June of 2019 (right in-line with SPY), bringing FXI's YTD 2019 gain to 10.6%.

(Source: Author, StockCharts)

Looking at the chart above, compared to other downtrodden sectors of the equity market, including out-of-favor energy equities, FXI continues to look pretty good technically, despite all the negative press about a structural slowdown in China.

Additionally, as referenced previously in these updates, China has been stimulating their economy since the fall of last year (2018).

In summary, the pace of fiscal and monetary stimulus in China has increased, which has led to surprise strength in the Macau gaming sector, including in both November and December of 2018, with gaming revenues coming in materially ahead of expectations during that time frame amidst a global equity melt-down, and this strength has continued into 2019, with Macau's gaming revenues continuing to come in above expectations, with the notable exception of April of 2019, including reaching five-month highs in May of 2019.

Additionally, led by strength in crude oil prices, commodity prices have rallied, suggesting that China, the biggest consumer of commodities in the world, Chinese economic growth, and Chinese equities, collectively all taken together, might have already bottomed. This narrative is further strengthened by the price action in the A-Share market, which is detailed above with the commentary on ASHR, which is up 28.4% YTD in 2019.

21. Given the strength in global equity prices in 2019, it is surprising, at least at first glance, that the iShares 20+Year Treasury Bond ETF (TLT) is up 10.5% year-to-date in 2019, including a roughly 1.0% gain in June.

(Source: Author, StockCharts)

Looking at the chart above, TLT has reached its 2016 highs, though on an unadjusted basis (taking out the cumulative dividends received), TLT is still materially below its 2016 highs (i.e. U.S. long-term sovereign rates are higher than their 2016 levels).

With the broader U.S. stock market indices (think SPY, DIA, QQQ, etc.) at new all-time highs, and TLT is still far above its November 2018 closing levels, a dramatic divergence has developed.

Ultimately, fixed income prices are going to have a very big impact on capital flows, and many of our most undervalued equities, so trends in the bond market are very important to watch going forward.

22. SPDR Gold Shares (GLD) gained 8.0% in June of 2019, breaking out of the hangover impacting GLD in the first part of 2019, which followed the strong absolute and relative performance of GLD in the fourth quarter of 2018. Year-to-date in 2019, GLD shares are now higher by 9.9%.

(Source: Author, StockCharts)

The decline in February of 2019 broke GLD's streak of four consecutive monthly gains, as shown above. Since then, GLD declined modestly in March and April, before resuming its climb in May, and then surging higher in June of 2019. From a bigger picture perspective, GLD has room to move higher after its recent technical price breakout.

23. Driven by the strength in crude oil prices, which have been a standout commodity gainer thus far, the $CRB Index advanced 3.2% in June of 2019, bringing its YTD gain through June's month-end to 6.6%, which is actually below where the $CRB stood at the end of February (up 7.6%).

(Source: Author, StockCharts)

Unlike the U.S. equity indices, including QQQ, DIA and SPY, the $CRB Index has not yet recovered its 2018 loss of -12.4%.

Bigger picture, similar to copper, which we will discuss below) the $CRB Index is still above its 2016 lows, and with long-term sovereign interest rates still above their 2016 lows, I think our longer-term investment thesis is still intact.

Adding to the narrative, commodities remain historically cheap relative to equities, which the 20-year chart below illustrates (for reference this ratio was 0.65 in February).

(Source: Author, StockCharts)

Believe it or not, even with the 6.6% YTD gain in the $CRB Index in 2019, this ratio actually got cheaper during 2019, because of SPY's greater gain (18.3% YTD in 2019).

One of these months we are going to see a sustainable breakout in commodity prices, occurring over the course of several months on both a relative and absolute basis.

So far, as I have said previously, there have been a couple of false breakouts in commodities relative to equities the past several years, and this has been frustrating, yet it does not change the bigger picture, which shows commodities more undervalued than they have been at any time over the past twenty years.

24. Even though $WTIC crude oil prices are up 28.8% year-to-date in 2019, and have been up strongly in percentage terms throughout 2019, the VanEck Vectors Oil Services ETF (OIH), which posted a 20.2% gain in January of 2019, was actually down in percentage terms YTD in May, before rallying 13.3% in June, to finished up 5.6% through the first half of 2019.

(Source: Author, StockCharts)

OIH remains a long way away from erasing its -45.0% plunge in 2018, and the under-performance of the oil services sector has ramifications for the broader energy complex.

An important step in this repair process will be if OIH can get above its 2016 lows, which there is still a ways to go to achieve this goal.

Additionally, as I have mentioned specific to the OIH, I have been closely monitoring Schlumberger (SLB), the largest company in the oil service sector, which rebounded 16.2% in June, and is now up 13.0% YTD in 2019.

While I really like SLB as a blue-chip out-performer, especially with is current 5% dividend yield, over the longer-term, there are a plethora of cheaper energy equities that are poised to deliver superior total returns whenever sentiment changes in energy sector.

25. Another strong performer during the month of June, really the strongest monthly gainer was the Baltic Dry Index, which surged higher by 22.3% in June. The strong monthly gain took the Baltic Dry Index out of negative territory into positive territory on a year-to-date basis, with the $BDI now sporting a 5.4% YTD gain.

(Source: Author, StockCharts)

With the surge higher in the $BDI Index, downtrodden shipping shares have rebounded higher, including Star Bulk Carriers (SBLK), my favorite dry bulk shipping firm, which gained 26.1% in June, and shares of SBLK are now up 5.6% year-to-date in 2018 after a roller coaster ride to this point.

26. Lagging even behind the performance of oil service equities on a YTD basis is the performance of smaller capitalization energy equities, as measured by the SPDR S&P Oil & Gas E&P ETF (XOP), which are higher by 3.3% YTD in 2019 after their 6.8% gain in June.

(Source: Author, StockCharts)

With $WTIC crude oil prices higher by 28.8% in 2019, and $BRENT oil prices higher by 20.3% in 2019, the under-performance of energy equities, particularly the smaller-capitalization energy equities (XOP declined -28.1% in 2018) is eye-opening, considering how much these equities have under-performed on a cumulative basis since 2016.

For this reason, there is much more opportunity in the smaller capitalization energy equities, and these equities dominate the list of our targeted highest appreciation potential equities, which is derived from my proprietary, discounted cash flow analysis, and customized financial modeling.

27. Copper prices gained 2.5% in the month of June, bringing the YTD gain in copper prices through June 30th, 2019 to 2.8%.

(Source: Author, StockCharts)

Copper prices remain on the edge of an inflection point short-term, as the monthly chart above shows.

Bigger picture, copper has held firmly above its 2016 lows, and appears to be at an even bigger inflection point.

A break higher, where there is a current set-up in place, would validate the 2016 lows, and if this happens, it would be a positive sign for stocks like Freeport-McMoRan (FCX), Southern Copper Corp. (SCCO), and the broader commodity sector.

Adding to the potentially bullish narrative, it is very unusual for copper prices not to make a new high by the time an equity bull market is over. Thus, I think the 2011 high in copper prices can be exceeded before the current equity bull market is over.

28. It took 28 slots, however we have finally arrived at the first negative year-to-date performer, which is the U.S. Dollar Index (UUP).

The U.S. Dollar Index lost -2.1% in June of 2019, going from a year-to-date gain prior to June, to a year-to-date loss of -0.1%.

(Source: Author, StockCharts)

Looking at the chart above, the U.S. Dollar Index remains at an interesting juncture, falling below its 10-month EMA for the first time since early 2018.

However, the U.S. Dollar Index remains in an up-trend, so that is a positive for Dollar bulls.

Superseding that fact, in my opinion, is the fact that the $USD remains below its 2015-2017 highs, even after a strong calendar 2018, where the U.S. Dollar Index rose 4.3%, finishing in first place in our 2018 year-end performance rankings, as almost all assets declined in 2018.

29. With the resurgence in precious metals, and precious metals equities, in the fourth quarter of 2018, and over the past two months, one fly in the ointment has been the performance of silver. Silver, as measured by the iShares Silver Trust ETF (SLV), rose 5.0% in June of 2019, however, SLV is still down -1.3% YTD in 2019, trailing the performance of GLD, which is up 9.9% in 2019, by over 10%.

(Source: Author, StockCharts)

Normally, in a strong precious metals rally, silver outperforms gold, and the junior gold miners, as depicted earlier by GDXJ, outperform the senior miners, as depicted by GDX. Thus far, that is not happening, yet.

Going forward, we would like to see silver out-perform gold, which it had done cumulatively in December of 2018, and January of 2019, before stumbling.

30. Staying in last place in our barometer rankings, following its 3rd place finish in our calendar 2018 rankings with a loss of -0.4% (almost all assets declined except cash in 2018), is dry natural gas, whose front month prices can be measured with the United States Natural Gas Fund (UNG). Dry natural gas prices have struggled mightily after their November of 2018 breakout higher, which was followed by a December 2018 reversal lower (depicted below). Year-to-date in 2019, dry natural gas prices are down -21.5%, after declining -6.0% in June of 2019.

(Source: Author, StockCharts)

Clearly, there has been a capitulation in dry natural gas prices, with seven consecutive months in a row down.

Ultimately, the long running bear market in natural gas, and natural gas equities, where almost all bullish investors have been trampled, makes this sector a very interesting hunting ground for a contrarian investor.

Closing Thoughts

After such a long article, I am going to make these closing comments brief, and in bullet form.

  • There was a selling panic in the fourth quarter of 2018, that has not reversed yet, meaning there have been continued equity fund outflows in 2019, even with the broader equity market bounce-back, including new all-time highs in SPY, DIA, and QQQ. The following chart from NDR shows just how dramatic the Q4 2019 selling panic was, and again, this pessimism and skepticism has not abated yet in the broader equity markets, let alone the out-of-favor equities.

(Source: Ned Davis Research)

  • The pessimism and skepticism has manifested itself in a renewed move towards bonds, with sovereign long-term bond yields declining materially in 2019.
  • Thus, almost all investors are positioned in the lower for longer narrative.
  • However, we are clearly later in the economic cycle, and employment slack has been used up, reflected now in the highest year-over-year wage gains in the current economic expansion.
  • Concurrently, commodity prices are rising, perhaps illustrated best by the roughly 60% price gain in $WTIC crude oil since January 1st of 2016.
  • Rising labor prices and rising commodity prices have already caused corporate profit margins to peak.
  • Declining profit margins, even in a continued economic expansion, could finally trigger a capital rotation, from growth to value, that could be bigger than the 2000-2007 capital rotation.

In closing, keep this thought in mind, growth has outperformed value for the better part of 12 years, with only a brief respite in 2016, and we all saw what happened our portfolios in 2016. If I am right, 2016 was the Appetizer, and the Main Course is coming, though I will be the first to admit, as someone with ample anticipation to a follow through in 2016, because of the secular inflection points reached in 2016, the wait for the Main Course has been excruciatingly painful, the most painful period of my investment career, and it still continues to frustrate, though I believe more firmly that ever that this historic capital rotation is on the horizon.

Disclosure: I am/we are long GOLD, FCX, SBLK, SLB, AND SHORT AMZN SPY AND TLT VIA PUT OPTIONS WITH SPY AND AMZN PUT OPTIONS AS HEDGES IN A LONG/SHORT PORTFOLIO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Every investor's situation is different. Positions can change at any time without warning. Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.