Over the past few weeks, I have been buying the semiconductors, particularly semiconductor equipment companies but also some of the chip names. The group did not get as cheap as I usually like, but with the cycles becoming muted compared to prior years, growth slowing and more capital discipline, I do not think valuations will get as low as they have in the past. Also technically, they appear to be bottoming.
To fund the purchase, I have liquidated my Canada short, my emerging markets short, and my energy and coal longs. I believe the market wants to move higher, regardless of the economic problems we are facing. The trade most likely to frustrate most investors - which is the modus operandi of the market - at the moment is an upward move, I believe.
I also believe that we are in a very wide trading range, and this is not the start of a new bull market. I believe the next few years will see a great deal of gyration but little forward progress as the problems in the economy take time to sort themselves out. This means that when expectations are low and the data shows that the economy is not on the verge of collapse - like today - the market will rally. However, when investors think its clear skies ahead, the economic weakness will reveal itself as being prolonged, disappointing investors and causing violent sell-offs. Thus, at some point, I will get aggressively short again.
I also think the commodity bull market is in the latter-stages. However, many commodities will not see their prior normalized levels. For example, I would be shocked to see oil at $40 again. But oil at $70 is very possible. I remain long some commodities that are a long ways from their inflation-adjusted highs. Oil is not one of them.
The market action this month has been, to some extent, nonsensical, in that groups that should not move together have been moving together. Today, both the price of crude and airline stocks went up. One explanation I saw for the strange move today was that a swap was being unwound, with corresponding anecdotal evidence to support this assertion. I have no idea if it is true, but schizophrenic action makes the most sense in a liquidity driven market.