Bull case for commodities and ex-U.S. stocks in 2021


Let’s take a quick look at the bull case for commodities and ex-U.S. stocks in 2021, particularly in the 2nd half of 2021 (we may get a correction first!).

ex-U.S. stocks just broke out above its January 2018 high while its 14 week RSI crossed above 70:

Historical cases of strong momentum almost always led to more gains for ex-U.S. equities over the next year, although a short term pullback was possible.

While the media was busy talking about Bitcoin, IPOs, and other speculative instruments, the commodities rally in December received much less attention. Commodities – and agriculture in particular – are on fire.

“Re-flation” is a big theme this year. The following chart illustrates the 52 week correlation between ex-U.S. stocks and agriculture. As you can see, both global equities and commodities are rallying on the re-flation theme. Emerging markets drive commodity prices.

Such strong correlation only happened 1 other time over the past 30 years: during the 2009 – 2011 commodities bull market:

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*The best way to use correlation is to identify which “themes” the market is reacting to. Both stocks and commodities are reacting to a very strong re-flation theme right now.

I’m a commodities bull for 2021. 10% of my portfolio is in silver as a long term hedge against inflation. However, we will probably see a major correction first.

*Note: I’m not predicting the end of the world or any of that nonsense. This is just an inflation hedge.

The best way to trade strong-momentum markets (e.g. commodities) is to use a trend following approach and slowly scale out of longs on the way up. Predicting tops in the advance is mostly futile since animal spirits can always push prices higher than you expect. Momentum is a powerful force, particularly when investors and traders start to pay more attention to “stories” instead of fundamentals.

Meanwhile in China, 15% of stocks are at a 52 week high:

Historically, such strong momentum could push Chinese stocks higher in the short term, but over the next year mostly led to losses.


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