August 29, 2017 – 05:30

It only took a few minutes after the launch of yesterday’s missile over Japan by N. Korea for the news to flow through the interwebs. I was sitting in a parent meeting for my child’s school when my phone started to buzz and I received the news. US Stock futures reacted as you would expect and safe haven gold rose. I was pleased that just a few hours before we had sold another position in a majority of our model portfolios, thus once again taking another step towards a bit more cash and a heightened defensive position. This morning the market is set to open down at least 1% with a brunt of the selling focused in the tech heavy NASDAQ.

The irony of the timing of all of this is just how much the market is in need of a pullback to begin with. It is long overdue for this and the only question is how long it will last and is it merely a repeat of what we’ve seen countless times over the last 8 years or the start of the real bear market? Rather than be inundated with media noise or general pundit opinions, the answer for me will be found by watching the market and money movement very closely.
This morning for example, one area that is up that doesn’t make a lot of sense if in fact we were to see the start of a real bear market, is copper. This is not a recipient of money seeking safety from fear and is also an area that has been doing very well of late, signaling a real economic turnaround within the hard asset, material space. One would expect stocks to drop, gold to rise but asset classes like copper are really up in the air and a good indication of a true market and economic temperature. This morning, I see that copper is trading around $3.10 per lb. The fact that it breached $3.00 recently is significant within its own right but to see the metal up over .50% this morning is a sign to me that this missile launch and market reaction may expedite the rotation we’ve been seeing develop for some time.

As most of you know by now I am not a perma-bull. This is a term used on Wall Street to describe someone who is always positive on stocks. You know the type. When the market is up they will tell you how great things are and how great things will continue to be. When the market is down, they’ll tell you it has never been a better time to buy. If it keeps going lower they just shake it off and smile at the bargain prices. Other than dangerous, these folks are just down right annoying. I am also not a perma-bear. These are the doomsayers or fear mongers. No, I like to say that I am agnostic to market movement and willing to remain flexible and open minded. I reserve the right to change my opinion when the facts change. To some, this is hard to understand. To others, like myself, it is the only way to approach the markets and investing.

So many folks have asked of my opinion on the markets lately. With almost 8 months gone in 2017 and a solid year thus far, it is easy to simply buy into the general idea of a market that is top-heavy, expensive and near the turning point of a dramatic decline. I would agree if in fact the entire market fit all of those criteria. You see the S&P alone is made up of 11 sectors and all 11 are not expensive and trading near highs. The few that are, such as technology and healthcare have garnered the most money and therefore taken on even a greater position in the indices. This overweighting of the most highest prices stocks, the most overvalued market caps has created the illusion that all sectors and all stocks fall into that same camp.

When I scan through the marketplace I see areas like energy, materials and financials that remain very attractive to me from a valuation standpoint and aren’t even close to trading hear the highs that so many other groups of stocks are. These value plays are going unnoticed because they do not carry the same weight as sectors such as technology or stocks such as Amazon or Google.

My view, at least for the time being is that rather than a massive decline the market is going and will be going through a sector rotation whereby money moves from the overvalued sectors into the areas that are depressed. I believe this is happening not only due to mere valuation (investors selling things that are expensive and buying things that are cheap) but also because of where we are in the current economic cycle. You see, when I fire up my Bloomberg this morning and see that amidst all the missile news, the sea of red and the negative commentary, copper is still trading higher. It tells me that real money believes folks will continue to buy copper as a raw material in order to make stuff. This is bullish and something I want to file away in the memory.

Make no mistake, the markets can be very fickle. If this conflict escalates I suspect we’ll see more selling which may trigger sell stops and require us to raise even more cash. I’m not however taking pre-emptive action and selling down more until the market shows its hand. It’s a wait and see game for now so grab some popcorn and pull up a chair.

 

(PS – I sent this out before my editor had a chance to do a once over. Mainly because I didn’t want to wake her and felt it needed be delivered to you immediately. Please excuse any typos or grammatical errors.)