These Stocks Are Breaking out, and No One Is Paying Attention
These stocks are breaking out, and no one is paying attention... Another reason to stay long U.S. stocks today... Why the next big move in rates will be higher... A new record for U.S. oil production?... More trouble for OPEC...
It's not too late to profit from this trend...
In Friday's Digest, we mentioned that Steve Sjuggerud's bullish "script" for Japanese stocks has been playing out as expected...
In short, last fall, Steve noted that Japanese stocks met his three favorite investment criteria: They were cheap, hated, and just starting an uptrend.
Meanwhile, Japan's central bank was getting worried its economy was falling back into deflation. Steve predicted it would keep interest rates at zero (or below) and print as much money as necessary to keep that from happening... and that this would eventually force money into Japanese stocks.
This appears to be happening now...
Last Friday, the benchmark Nikkei 225 rose 1.6% to close above the 20,000 level for the first time since July 2015. Japanese stocks are now up nearly 20% in the last six months, and nearly 10% in the last two months.
But if the latest report from investment bank Goldman Sachs is any indication, we could see much more upside ahead. You see, despite the new highs, Goldman says U.S. investors still aren't interested in Japanese stocks. As Bloomberg reported over the weekend...
"Overall interest in Japanese equities was fairly subdued during our recent U.S. marketing trip," Goldman Sachs analysts Kathy Matsui, Hiromi Suzuki and Kazunori Tatebe wrote in a June 1 report. "Most long-only U.S. investors remain underweight Japan."
They would have been missing out on Friday, when the Topix index closed at its highest level since August 2015. The gauge as of Monday's close has a total return of 7.1% for 2017, or 13% in dollar terms. By comparison, the S&P 500 Index's return is 9.9% this year.
True Wealth subscribers can read Steve's complete write-up on Japanese stocks from November right here.
"Investors are ready to sell at the first sign of trouble"...
Speaking of Steve, regular readers know he also remains bullish on U.S. stocks. In fact, he believes the final, most explosive innings of the long bull market still lie ahead. He predicts we'll see a "Melt Up" – where stocks soar to absurd heights – before it finally ends.
We've shared several reasons Steve's prediction isn't as outlandish as it might initially appear. Today, Steve shared another.
As he wrote in today's edition of our free DailyWealth e-letter, last month's "mini-panic" showed us something important...
The world's most famous stock market index (the Dow Jones Industrial Average) fell around 370 points on May 17... In technical terms, the move was "two standard deviations beyond normal." In plain English, it was a panic.
The move wasn't that big on paper... That 370-point fall was less than a 2% loss. But it shocked folks... Trading has been so sleepy lately that investors panicked. You can see it in their trading activity...
My good friend Jason Goepfert at SentimenTrader reported that on that day, "There was a monster spike in [panic-based exchange-traded fund ("ETF")] volume, accounting for nearly 8% of NYSE volume, by far the largest ever."
Jason defines a "panic-based ETF" as one of two types of funds:
- An inverse ETF, or
- A volatility-based ETF.
In short, these funds typically perform well when stocks fall. So when investors fear big downside risk or major volatility ahead, they rush to these kinds of funds.
As Steve explained, that's exactly what they did. And he says this is actually an incredibly bullish sign...
Investors are fearful and twitchy. We don't have that feeling of euphoria in the stock market at all. Last month taught us that investors are ready to sell at the first sign of trouble.
History also shows that we likely have more upside ahead. Jason has studied other similar moments of panic-based selling going back to 1928... And he found that after panics like Wednesday's, stocks are typically up two months later, with solid gains and a high winning percentage.
In short, last month's panic tells us we're not at a top. Instead, the current bull market has plenty of room to run higher. That's why my long-term advice on stocks hasn't changed. We want to continue owning U.S. stocks now.
In other words, while we're beginning to see signs of excessive optimism, we don't yet see the widespread optimism and lack of fear that tends to accompany a major market peak. And that means stocks can still go higher.
If you're not yet a True Wealth subscriber, you can learn more about Steve's "Melt Up" prediction right here (without sitting through a long promotional video).
U.S. Treasurys hit a 10-year extreme...
Last month, we noted a major reversal in the U.S. government-bond market. As we wrote in the May 2 Digest...
Just a few months ago, speculative traders were holding an all-time-record short position on benchmark 10-year U.S. Treasury notes.
But remember... because bonds and interest rates trade inversely, a big bet against 10-year Treasurys was also a big bet on higher interest rates. This bearish extreme suggested bonds were likely to move higher, while rates moved lower. And that's exactly what happened...
Since then, rates have drifted lower. They've fallen from as high as 2.6% in early March to around 2.3% today... Though the move in rates has been relatively small, speculative traders have had a huge change of heart over the same period. They've quickly gone from as bearish as they've ever been... to as bullish as they've been in at least five years.
Incredibly, since then, this extreme has only grown more extreme. Speculators are now as bullish as they've been in nearly 10 years, since late 2007...
As we always remind you, the Commitments of Traders ("COT") report can be a powerful indicator... But like all sentiment data, it is not a precise timing tool.
Extreme sentiment can always become more extreme before reversing. And that is still the case today.
But the data continues to suggest the next big move in interest rates is likely to be higher.
It's been a tough couple of weeks for oil...
West Texas Intermediate ("WTI") crude oil – the domestic benchmark – fell as much as 1% this morning to less than $47 per barrel. Prices have been sliding for nearly two weeks since setting an intraday high of $52 per barrel on May 25.
It's not a coincidence that was the same day the Organization of the Petroleum Exporting Countries ("OPEC") agreed to extend its existing production cuts.
As regular readers may recall, the Saudi-led cartel – along with 10 non-OPEC producers, including Russia – originally agreed to cut its total production by 1.8 million barrels per day ("bpd") through the end of May. The new agreement will extend these same cuts for another 10 months, through March 2018.
Oil plunged 4% following the news that day... It seems the market was hoping for an increase to OPEC cuts, rather than just an extension.
Why? Because the current cuts haven't reduced the global glut of oil in storage anywhere near as much as OPEC had hoped. Meanwhile, U.S. shale production continues to rise...
As you can see in the following chart, U.S. output is on pace to reach a new all-time high of 9.9 million bpd as early as this fall...
And the rebound shows no signs of slowing. According to the latest data from oil-services company Baker Hughes, the U.S. oil rig count rose again last week for the 20th consecutive week. It now sits at 733 active oil rigs, the most since early 2015.
Unfortunately, soaring shale production isn't the only concern for OPEC these days...
Oil production in other companies is now rising again, too. As the Wall Street Journal noted last month...
A wave of new petroleum production from countries like Canada and Brazil is adding a new problem for oil traders who until now had been primarily preoccupied with U.S. output and an OPEC-led coalition cutting supply...
Not counting the U.S. and the 24 countries in the OPEC-led coalition, the next five biggest producing countries are poised to increase their combined output by around 300,000 barrels a day, according to a Wall Street Journal survey of five oil research agencies and investment banks.
Canada and Brazil, the world's seventh and 10th biggest suppliers, are projected to record the fastest production growth outside the U.S. this year as long-planned projects come online. Norway and the U.K. are also seen as raising production this year, though by smaller amounts. Of the five countries, only China's output is expected to fall this year...
"This is all part of the larger issue—there is still a lot of oil out there," said Olivier Jakob, managing director of industry consultant Petromatrix.
Even deep-sea oil projects – long among the most expensive oil operations – are now making a comeback. As Bloomberg reported last week...
Reports of deep-sea drilling's demise in a world of sub-$100 oil may have been greatly exaggerated, much to OPEC's dismay.
Pumping crude from seabeds thousands of feet below water is turning cheaper as producers streamline operations and prioritize drilling in core wells, according to Wood Mackenzie Ltd. That means oil at $50 a barrel could sustain some of these projects by next year, down from an average break-even price of about $62 in the first quarter and $75 in 2014, the energy consultancy estimates...
"There is life in deep-water yet," said Angus Rodger, director of upstream Asia-Pacific research at Wood Mackenzie in Singapore. "When oil prices fell, many projects were deferred, but the ones that were deferred first were deep-water because the overall break-evens were highest. Now in 2017, we're seeing signs that the best ones are coming back."
Meanwhile, there are signs that OPEC's solidarity could be waning...
Data suggest OPEC production actually rose last month for the first time since the deal went into effect in January. As news-service Reuters reported last week...
OPEC oil output rose in May, the first monthly increase this year, a Reuters survey found on Wednesday, as higher supply from two OPEC states exempt from a production-cutting deal, Nigeria and Libya, offset improved compliance with the accord by others...
OPEC announced a production target of 32.50 million bpd at its Nov. 30 meeting, which was based on low figures for Libya and Nigeria and included Indonesia, which has since left... The Libyan and Nigerian increases mean OPEC output in May averaged 32.22 million bpd, about 470,000 bpd above its supply target...
This morning, the financial media reported that Saudi Arabia, Egypt, Bahrain, Yemen, and the United Arab Emirates are cutting ties with fellow member Qatar. While the move was largely political, it's likely to increase doubts about the stability of the extension going forward.
And over the weekend, the head of Russia's largest oil company – and the largest non-OPEC producer in the agreement – said it won't hesitate to ramp production back up if the deal falls through. As the Financial Times reported on Sunday...
In a rare interview, Igor Sechin, Rosneft's chief executive, said the company was closely monitoring output from US shale producers, amid debate in the oil market over whether the Opec-led agreement's effectiveness is waning.
"Well, if the question is how Opec is going to exit from these arrangements: abruptly," Mr. Sechin said. "We will also be prepared. If something goes wrong, we will not let them occupy our markets. We'll defend ourselves."
We continue to expect lower prices in the near term.
New 52-week highs (as of 6/2/17): AMETEK (AME), Amazon (AMZN), Allianz (AZSEY), Boeing (BA), Becton Dickinson (BDX), Blackstone (BX), Global X China Financials Fund (CHIX), First Trust Nasdaq Cybersecurity Fund (CIBR), Quest Diagnostics (DGX), Digital Realty Trust (DLR), WisdomTree Japan Hedged SmallCap Equity Fund (DXJS), Eaton Vance Enhanced Equity Income Fund (EOI), iShares MSCI Japan Fund (EWJ), iShares MSCI Singapore Capped Fund (EWS), iShares MSCI South Korea Capped Fund (EWY), Facebook (FB), Barclays ETN+ FI Enhanced Europe 50 Fund (FEEU), Fidelity Select Medical Equipment and Systems Fund (FSMEX), iShares China Large-Cap Fund (FXI), Global X MSCI Greece Fund (GREK), PureFunds ISE Mobile Payments Fund (IPAY), iShares U.S. Home Construction Fund (ITB), Johnson & Johnson (JNJ), Nuveen Preferred Securities Income Fund (JPS), McDonald's (MCD), iShares MSCI China Index Fund (MCHI), 3M (MMM), Monsanto (MON), Microsoft (MSFT), AllianzGI Equity & Convertible Income Fund (NIE), PowerShares S&P 500 BuyWrite Fund (PBP), ProShares Ultra Technology Fund (ROM), Shopify (SHOP), ProShares Ultra S&P 500 Fund (SSO), Stanley Black & Decker (SWK), Guggenheim China Real Estate Fund (TAO), T-Mobile (TMUS), Two Harbors Investment (TWO), Invesco High Income Trust II (VLT), Verisign (VRSN), Weight Watchers (WTW), ProShares Ultra FTSE China 50 Fund (XPP), and Direxion Daily FTSE China Bull 3X Fund (YINN).
A quiet day in the mailbag... more feedback on last month's big event – "The Day the Bull Market Will End" – and a longtime subscriber shares our opinion on a market legend. Send your notes to feedback@stansberryresearch.com.
"Really enjoyed the [TradeStops webinar]. I have always used 'stops,' but you just reinforced my thinking. Steve, I'm with you all the way with China. I have bought everything, and have an order in to buy China Banks at a reasonable price. GO CHINA!!" – Paid-up subscriber Bob B.
"'This time is different.' When even Jeremy Grantham falls for this fallacy, you know we're near the cliff. I have great respect for his market intelligence and predictive prowess, but in recent years, he's traveled along the climate catastrophe and peak oil roads, so my admiration is somewhat diminished by a tendency to fall into trendy traps. Maybe this time is different." – Paid-up subscriber L.F.
Porter comment: I feel exactly the same way...
Regards,
Justin Brill
Baltimore, Maryland
June 5, 2017