A Silver Miner Breaking Out of a HUGE Base [DIRTY DOZEN]

Research

Oct 11

It has taken me years to unlearn everything I was taught, and I probably haven’t succeeded yet. I cite this only because most of what has been written about the market tells you the way it ought to be, and the successful investors I know do not hold to the way it ought to be, they simply go with what is. ~ Adam Smith, “The Money Game”

Good morning!In this week’s Dirty Dozen [CHART PACK] we look at triggering breadth thrusts, a bullish small-cap anomaly, investor portfolio preferences, and why it's bullish for stocks. We then go through some ratio charts, plummeting nat-gas production, a bullish silver miner breakout, and an EM ETF that looks ready to moon, plus more…Let’s dive in.

***click charts to enlarge***

The evidence for the bull case continues to build… @WillieDelwiche wrote the following on the below NDR chart “It looks like we can add to the list of improving conditions a new round of breadth thrusts. Over the past 10-days, advancers have outpaced decliners by 2 to 1 (above 1.9 is a breadth thrust) and 89.6% of stocks are above their 10-day averages (90% is the threshold for a breadth thrust). Getting the percentage of stocks above their 50-day average above 90% (currently 67%) would also be a breadth thrust. Historically, breadth thrusts provide a bullish tailwind for equities that can last for up-to a year.”

Small-caps are seeing incredible buying pressure as well with a 10%+ rally in under 2-weeks. SentimenTrader points out that “this kind of rebound typically happens after severe weakness, either on a relative or absolute basis. Either way, there have been only 20 distinct times over the past 40 years when the index shot higher by at least 10% over a 10-day stretch.”

Below is the return dispersion following every other instance over the last 40-years, again via SentimenTrader. It has a strong record as a very bullish signal. And perhaps most remarkable is that the market ran higher over the following month 100% of the time, with a median return of 5.9%.

One significant driver of the fundamental bull case is the gross underweighting of risk assets following the large fiscal stimulus. The newly introduced cash automatically reweights cash/bonds higher relative to stocks. This allocation mix is likely to change in favor of more equities in the coming year — afterall, both cash and bonds are now a negative carry trade! And that’s an incredibly bullish tailwind.

Orders/inventory ratio is signaling a surge in the global manufacturing PMI over the coming quarter.

I don’t know about you but I’m getting a bit tired of these “ratio” charts showing how undervalued energy, materials, commodities etc… are to growth and tech. So maybe this will be the last one I share. Though, I have to say, the macro picture is finally becoming supportive of a coming regime shift over the next 12-months.

Another sign of the times… Exxon, once the largest company in the world, now has a smaller market-cap than NextEra Energy, a renewable energy utility.

Not surprising, as oil has been in a bit of an extended rough patch… COVID took the legs out from under demand but I think we see that change in the next quarter. And then, recovering demand will begin to meet with an increasingly tight supply picture.

@HFI_Research shared this great chart of US nat gas production. This is one reason amongst many on why we’re bullish nat gas and related securities going into 2021.

@TimmerFidelity tweeted last week that “If the current liquidity impulse becomes semi-permanent, history suggests that a massive rotation from growth to value and from financial assets to real assets may ensue. The long “super cycle” for real assets is due for a turn.”

I concur…

MAG Silver Corp (MAG) has broken out of a 13-year rectangle base. The chart below is a monthly. The measured move target is just below $30 a share, which is roughly 50% above current prices. You can find our precious metals framework and long-term bull case here.

We believe we’re in the very early stages of a transition from a Core to a Periphery led regime. This is being driven by a lower US dollar. As such, we should expect emerging markets to soon take over as relative leaders, globally. China A-shares is one such market that you might want to consider adding to your book. A Biden presidency (something I view as highly likely) will be more favorable to China and its equity market.