One listening tool is the new 52-week high/low list which often reveals the current dominant theme that is driving the markets. A dominant theme is an investment strategy that seems to work in confusing times. Currently there are two dominant themes. One is the great 2011 – 2012 yield chase that has investors crowding into the pipeline, REIT and telecom space in search of income. The other dominant theme is the bearish stampede out of the gold and silver miners and the oil and gas producers.
Sometimes a dominant theme will fade and others will persist and introduce a secular bull or bear market which is a very long-term trend up or down that can persist for several years. These long trends are interrupted by the shorter, four-year bull and bear cycles and hence the term secular trend.
The first modern secular uptrend was the post-World War II boom of 1949 through 1966. It ended when the Nifty Fifty buy-and-hold asset bubble popped in reaction to the 1973 Arab Oil Embargo.
The great 1973 – 1974 energy crisis introduced the first modern secular downtrend that persisted though to the early 1980s.
The second modern secular uptrend began in mid 1982, The dominant theme leaders at that time were the innovative New Economy companies such as Microsoft Corp., Intel Corp. Apple Inc. and the soon-to-be, super-retailer Wal-Mart Stores Inc.
The 2000-2002 technology crash effectively ended the great 1982-2000 advance and introduced the second modern secular downtrend that has so far persisted through 2012. These secular down trends or secular bears are the perfect environment for those doom and gloom authors accompanied by the chirping of the “buy and hold is dead” birds.
The challenge during these difficult periods is to sift through the current dominant themes in order to see which one has the legs to introduce a new longer tem secular advance.
Last week in Toronto a look at the new 52-week low list displayed the usual suspects, about a dozen new 52-week lows in the gold and energy stocks and of course, Research In Motion Limited. In New York the selling seemed to be in the solar and mobile telecom space.
Last week in Toronto the new 52-week high list also contained the usual suspects, about a dozen new 52-week highs in the REITs along with surprising names like Heroux-Devtek Inc. (aerospace), Agrium Inc. (food) and Norbord Inc. (wood).
In New York the buying seemed to be in the pharmaceutical and REIT space along with some interest in Raytheon Co. (aerospace and defence) and Weyerhaeuser Co. (wood).
The obvious dominant theme is the bullish stampede into the yield space but I can’t imagine investors spending the next ten years buying REITS, telecoms, utilities and pipelines unless they believe interest rates will never go up in our generation.
This less obvious dominant theme seems to be wood with stocks like Rayonier Inc. (RYN), Weyerhaeuser Co, (WY), Norbord Inc. (NBD). Acadian Timber Corp. (ADN) and West Fraser Timber Co. Ltd. (WFT) close to, or just posting new 52-week highs.
Could a wood or lumber-based dominant theme introduce a new long term secular advance in the lumber complex?
Our chart this week spans about ten years and is the monthly closes of Weyerhaeuser plotted above the price of lumber as traded on the CME (the former Chicago Mercantile Exchange)
Most commodities as measured by a broad basket (to include lumber) such as the Thomson Reuters/Jefferies CRB Commodity Index bottomed in 2001 and began a long secular advance that still remains in place today. In 2005 the price of lumber turned lower due to over-production and a U.S. housing bubble to finally bottom in mid 2009 at a price lower than the 2001 bottom.
In other words, lumber is one of only a few major commodities to post a ten year low during the financial crisis of 2007-2008.
I suspect lumber is a late arrival to the commodity party and if so the safest way to participate would be to acquire basket of lumber related assets such as the NYSE listed iShares S&P Global Timber & Forestry ETF (WOOD) which seeks investment results that correspond generally to the price and yield performance of the S&P Global Timber & Forestry Index.
Other possible emerging themes are food, aerospace and alternate energy. Patience is the key because these trends can take years to get established.
Bill Carrigan, CIM is an independent stock-market analyst. He can be reached at:email@example.com
- Weyerhaeuser, The Last Timber REIT (seekingalpha.com)