Tuesday, October 20, 2009

The new leaders

It's pretty common in a new bull market to see dumb money run right back to the leading stocks of the last bull. We are seeing it now in AAPL, GOOG and XLE. Gadget makers, internet advertising and energy, the leading sectors and stocks of the `02-`07 bull market.

I'm confident in saying they are not going to be the leading stocks or sectors of this bull market. The fundamentals of this bull are completely different than the `02-`07 period. During that period we had a housing & credit bubble and rapid expansion in emerging markets. That translated into massive demand for energy and base metals. Easy credit meant everyone was free to load up on any and every toy imaginable, from Hummers to Ipods.

That's not the case anymore. The world is going to be stuck in an on again off again recession or depression for many years to come. This bull market is going to be built on monetary expansion. That my friends is the domain of precious metals.

Look at the weekly volume in AAPL, GOOG and XLE. Every single one of them is showing half the volume that they enjoyed when they were in true bull markets, when the fundamentals supported their business models. That's not the case anymore and smart money knows it.

What we are seeing is nothing more than retail buyers flocking back to the old sectors. I see the same thing in the housing market. Dumb money is trying to pick a bottom because they assume that if they can catch the bottom housing is going to take off soon and they will get rich.

I've got news for them. Bubbles don't re-inflate. Housing isn't ever coming back again, not in the next 20-30 years anyway. Just look at tech. Once the bubble burst in 2000 the Nasdaq hasn't even come close to the old highs and it's not going to for many years to come.

How about the Nikkei? Their bubble burst in 1990. The Nikkei is still down 70+% from the old highs and it's been 19 years.

Folks new bull markets are built on new fundamentals and this one is no exception.

Now take a look at the volume in the miners ETF (GDX). There is your leading sector for this bull market. This is where the smart money is going.

Now that being said I believe we are due for an intermediate pull back in all markets including precious metals so if one hasn't got in yet perhaps a little patience is warranted. I would look for a bottom sometime in mid Nov. or if gold can retrace back to $1000.