Are you bullish or bearish on equities?

We are bullish on risk assets. Specifically, we are bullish on commodity related equities. Countries with heavy exposure to commodities such as Canada, Brazil or Australia could easily reach new highs in their indexes. The mainstream media is still preaching to sell cyclical and risk assets. Therefore consider the exact opposite. The majority of investors are convinced that we have already begun a major bear market.

How about US treasury bonds?

US treasuries (TLT) have gone through a recent slump followed by a rebound. This will convince those safe haven investors that pull backs are buying opportunities. This sector is insanely overbought and will commence another round of free-falls quite soon. TLT still has a long way to go down before reaching acceptable levels. Eventually US treasuries (TLT) will reach a level such that their investors will panic and sell at very low prices. The treasury market has to punish all the flock investors and advisors who told their clients, “let’s be safe.” Once everybody abandons US treasuries (TLT), then it will time for us to go long.

What about defensive equities that pay a regular dividend? Aren’t they a good bet to participate in the Rally?

The answer is “no.” Nearly all defensive stocks and corporate bonds with high dividends will experience a grinding downtrend soon. This will happen once hedge funds and mainstream money managers start realizing that they have crowded into low-risk positions, expecting a deflationary period. That is when the S&P will start a strong rally. This will create despair and doubt in the mind of these managers, market timers and people who are following the well-known financial media. They are all expecting a major deflationary time and a bear market for risk assets.

Raw material ETFs are going to enjoy the biggest percentage gains from their present depressed levels. Small caps and high tech will also enjoy a healthy run.

How about the US dollar?

The down trend in the US dollar will continue. The Euro and Swiss Franc will go up higher because nobody expects such a phenomenon. The only traders that are going to benefit from this currency trade are very sophisticated and small groups that trade for Major multinational firms. Presently they are short US dollar and long Euro. So far they have made good money by shorting at $1.22 because they are up 400 basis points with Euro trading at $1.26. Countries that are major exporters of raw material will experience a higher value of their currency for the next 4 to 5 months. After that, the US dollar will be the king again.

Wrap up

Remember, rallies usually start with a whisper when the media, money managers and average investors do not expect it. Presently the majority of hedge funds and momentum traders are bearish, holding short positions in risk assets. When these people start covering their short positions at higher prices, because they have confirmation of a trend change, and subsequently move into risk assets, then it is time for experienced savvy traders to move out of risk assets and into safe-haven instruments. We at ETF Trade Advisor will have enough warning, via our most reliable indicators, to shift our portfolio. It’s all about understanding the emotions that drive the average investors and money managers.