"Courage is being scared to death, but saddling up anyway."
-- John Wayne
Time to fess up: Yes, we're sucking wind this year -- and it hasn't been a lot of fun. Sometimes the market carries your stocks and investments upwards to the sky, and you feel like a genius, other times, it seems like every trade you make is the wrong one and the market deems you an idiot.
The latter is certainly the case at the moment with our model portfolio down 8% YTD and the S&P close to new all-time highs. I'll be honest, this doesn't make me feel good -- this is the first time in 10 years that my model portfolio has been so deeply in the red after one quarter (we have yet to have one finish the year in the red). But I'm not going to make things up and say it's okay, it's not.
But I'm also not going to panic, because panic is exactly what the market wants you to do, which is why markets often appears to shift gears just after capitulation (whether it's your personal capitulation or the general public's). The Rayno Report portfolio has been pummeled by the plunge in gold and silver and related shares. Also, energy has been surprisingly weak. I own a number of commodity names. The ferocity of the decline in the commodities complex has surprised me, but perhaps what's more surprising to me is that it has been accompanied by a rising stock market (typically plunging commodities fortell weak economic growth, and therefore are often correlated with falling stock prices; this happened in 2008).
Yes, the "Quantitative Easing" program was suppose to stoke inflation and push commodities skyward, but it hasn't, it's pushed commodities into the ground. There may be complex reasons for this but on the surface it's a paradox. My only reasonable explanation is that the situation in China is worse than thought. This is a market of many paradoxes. Below, a chart shows the extreme divergence between commodities and equities.
The S&P 500 is green, a leading commodity index is in blue. What's so strange about this is that it goes against the grain of the post-2009 recovery trade, in which these assets had been correlated by about 90%.
One bright spot in our calls: We've written here regularly about the "stealth bull market" in biotech shares, which seem to go up every day. The iShares Nasdaq Biotechnology ETF is at new highs near 173, and it's up 21% year to date. Although we hold it in our model portfolio, that's not enough to overcome our worst losers such as Royal Gold (down 32%) and First Majestic Silver (40%). Shoulda bought more biotech. Shoulda coulda woulda.
That's the kind of the market in a nutshell in 2013 -- extremely powerful stocks thrusting to new highs regularly, with others simply left behind. The one observation I have about this market is that it's certainly not as easy as it looks, because many solid stocks have been left behind. One example is Intuit, a technology stock we like because of its steady growth, cash flows, and reasonable valuation. Inuit is a great company, but it's done nothing this year -- it's down 5% in the middle of a "bull market."
So what am I go to do? Absolutely nothing. The reason? April/May has been a key turning point over the years, so I'm going to watch the market closely as we glide into May. My instinct is that it's overbought and getting overvalued, and people will want to take profits going into the summer. Chances are the numbers in our portfolio will improve as the trends change. Precious metals have been so beaten up and have gotten so cheap that something has to happen -- at least a healthy short-term "dead-cat bounce." It's too late to sell them now, and with some of them no yielding over 2%, it's worth just sitting on them. It's early -- it's only April. Energy can still rally. A lot can still happen in 2013.
I would not be shocked at all to see gold and silver turn around and make new hights. To a certain extent the paradox of our portfolio is the paradox of the market -- that some stocks, such as the biotechs, march up nearly every day, but cheap, pedestrian technology stocks such as Intuit do absolutely nothing. We'll cover the paradox of the gold market in my next article.