The U.S. equity markets are breaking into new 15-year highs, after an unprecedented move by Bernanke to stimulate the economy over the past five years.
Increasingly, investors may look to cheaper, out of favor sectors such as the uranium and rare earth sector, which is critical for clean, carbon-free energy. These sectors are crucial for the carbon reducing future of emerging nations such as China and India, which are dealing with dangerously high levels of air pollution from dirty coal producing plants. Take a look at this picture of Beijing. Air pollution is a major health crisis that is killing people.
Investors may be asking themselves where could there be the ability to outpace some of the overbought sectors, such as financials and housing. If this rotation into commodities takes hold and the rally continues, look for exceptional gains in the clean energy metals uranium (URA), platinum (PTM), Palladium (PALL) and rare earth stocks (REMX), which have been basing for more than two years. The materials sector historically lags other sectors such as the financials and industrials in an expansionary cycle, but eventually outpaces as a bull market develops. Over time I have found it wise to buy cheap commodities when equity markets are overbought.
We have witnessed an extremely peculiar rally in that U.S. equities are hitting new highs at the same time that uranium and the rare earth sector is hitting a new low. This should not last for much longer as a recovering global economy demands clean and cheap energy, fuel efficient, low-emission vehicles and high-tech products such as smart phones and iPads.
Eventually, as the stock market climbs into new highs the dividend paying large caps become too expensive and that is when we could witness the rotation into more speculative possibilities, especially in the uranium and the rare earth mining sector, where there is potential for outsized capital gains as the need for clean carbon-free energy increases exponentially over the coming decade.
In addition, demand for high tech products such as smart phones, iPads, and high definition TV's and monitors are growing at an unbelievable rate. This could cause supply shortages for critical metals used in lighting and monitors.
A reason for this underperformance in rare earths is that Asian markets have not yet kept pace with the rebound in U.S. equities. However, that may change as a strong U.S. consumer is a boom for Chinese and Japanese exporters.
In the past six months, the Japanese Nikkei Index (EWJ) has outperformed all other markets, including the United States. This may indicate the beginning of an inflationary rally in Asia and may signal that Chinese and Japanese markets are ready for a rebound.
The U.S. equity market is continuing to rise without any pauses or healthy corrections. This is becoming a parabolic move where caution should be exercised. In such upward moves like we are experiencing now a healthy correction would be warranted.