It's been nearly two weeks since we got a better than expected Q3 GDP reading, better than expected unemployment report and another Fed rate cut to boot. This all adds up to a broad risk-on sentiment that will likely send equities higher as we close out the 4th quarter of 2019.
There are a few trends that I'm watching this week, namely the action in gold prices and MLPs.
VanEck Vectors Junior Gold Miners ETF (GDXJ)
After rallying for much of the summer months, gold prices have been stagnant within a range of roughly $1450-1550. I maintain that gold is positioned for a run towards $1700 as some of the underlying U.S. and foreign economic data points to a continued global slowdown. In the meantime, though, it might take some time for gold to get moving.
Investors have been shedding defensive positions in favor of cyclical sectors while foreign equity markets have been turning more optimistic on central bank activity and slowly normalizing sovereign yields.
Gold miners have had a solid year overall but I expect the consolidation period to continue into 2020. I think GDXJ and other gold-related trades could be flat to down through the remainder of 2019 but worth revisiting when we turn the calendar.
Alerian MLP ETF (AMLP)
MLPs have experienced two straight months of losses but have slipped into oversold territory. The bearish sentiment in oil-related sectors is understandable as global energy demand is expected to continue weakening all areas across the production and refining path.
Chesapeake Energy's miserable Q3 earnings report tells us that conditions are still really bad in the energy sector.
But energy stocks have been outperforming the S&P 500 over the past month as cyclical and value trades come back into favor. I think MLPs could be poised to catch up. This wouldn't be a long-term trade but more of a short-term mean reversion trade. I think a logical target would be the $8.70 level that it bottomed at twice back in August implying a short-term 4% upside from here.
Vanguard Value ETF (VTV)
Speaking of value trades, have you noticed that it's actually been value stocks that have been leading the market higher in the past two months?
The economic backdrop should be supporting growth outperformance but valuations there are getting stretched and investors are turning instead to undervalued stocks for upside. Value stocks trade at about a 20% discount to the broader market and represent an opportunity for multiple expansion.
Banks and energy stocks are looking relatively attractive and both sectors are overweight in value ETFs.
SPDR S&P Bank ETF (KBE)
For the first time in what feels like forever, we have a normalized yield curve again! The 10Y-3M Treasury yield spread, which was -0.51% in September, is now at +0.39%. This is excellent news for the financial sector which has seen its profit margins squeezed incredibly thin with a flat or inverted yield curve.
I've been impressed with how banks have maintained profitability despite the yield environment. Now that the curve is steepening again, this could the beginning of a big move in bank stocks.
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