Line Up Your Winter Gig Before Everyone Else

We have come a long way since the first half of 2008 and even parts of 2011, when the non-precious materials plays dominated the screens of momentum traders. 

Since then, a new batch of speculators entered Wall Street pretty much focused on tech. 

However, we may be in the early innings of seeing wildly expensive tech valuations (combined with uniquely steep technicals amid overhyped sentiment) take a breather while capital rotates over to deep values housed in many names in, say, the XME ETF. 

As a few examples, if you take a cursory glance away from the likes of DKNG PENN WKHS ZM and towards CLF and FCX, you may be shocked to see the impressive rallies in the latter two in recent weeks/months. Also note that CLF FCX, two mostly non-precious materials miners, were among the hottest names in the entire market in early-2008 and parts of 2010/2011. And then some steel names like X are spiking hard today, to boot. 

Why were those names so hot back then?

Well, for starters, early-2008 saw a now-infamous inflationary "head-fake," which had crude oil exploding to $150/barrel and many steels, solars, and fertilizer stocks all enjoying vast run-ups as market players mistakenly inferred that the world was on the cusp of a global boom.

Instead, we saw the global financial crisis take hold into autumn and an epic deflationary crash across the board. 

This time around, we could see the inflationary-head-fake-leads-to-deflationary-crash line again. But we would need to see the actual inflation trade first before getting to that point, perhaps. And, of course, there is always the possibility of actually inflation being the menace this time around (not a mere head-fake!) especially as The Fed essentially punts on inflation risks and goes all-in on trying to stop deflation. 

As absurd as I personally think their policy is, that is where we are right now. And as cheap as some of the XME names are (RIO is one example) on a fundamental basis, sooner or later I expect capital to rotate down to materials from tech beyond a week or two. 

On the XME quarterly chart, below, holding just above those late-2015/early-2016 is the linchpin here and drives home the notion that this sector has been basing out down around these levels for many years, at this point. The only thing not priced into these names, in terms of the downside risks, is a cataclysmic deep deflationary depression. Beyond that, they represent value and perhaps asymmetrical risk to the upside.