Hero Worship

My job as a macro-oriented observer has just gotten easier. Now that the 'wall of worry' has been reduced to a crumpled heap of bricks, it is clear where we are in the market psychology cycle. I bet we are somewhere between "Belief" and "Thrill" on the chart below, depending on whether you own Bitcoin. But fear not; money can still be made if you are nimble. If not, buy laddered CDs and stop watching the markets now that the easy money has been made. Your call.

Yes we are at all-time highs. But no the bull market isn't done just yet. We need some euphoria first.

And speaking of euphoria, I've just returned from my trip to Nassau and a week off from the markets. I was there as a guest of my dear brother-in-law, who invited Pat and me to watch the Hero World Challenge golf tournament at the Albay Club in the Bahamas. It was easily the best golf watching I have done in twenty years. The attendance levels are a fraction of the majors, and the accessibility to the players is almost at a pro-am level - and 80 degrees and sunny wasn't that hard to take either!

Last week's notable market event was the capitulation of the last bear standing, David Rosenberg. He finally admitted that if people want to buy stocks, he can't stop them. It must have taken courage to admit that the markets respond to the anticipations of others and not to an over-paid advisor who has been mostly wrong for 40 years.

But enough of kicking a guy when he's down. It just doesn't have the same satisfying feeling when I have been too cautious and looking for a correction that doesn't seem to come. Oh well, at least I said to buy Air Canada at $16 this year. But as for macro moves, when there is too much money chasing too few stocks, I don't like my chances to get a meaningful pullback soon. Especially when the Fed and the Republicans act like cheerleaders at a college homecoming game.

Is there somewhere else that has seen a pullback that can be bought? I missed the Trump bump, so now what do I do? I saw it right before my eyes this week in the Bahamas - India! Hero, the sponsor of the aforementioned gold event, is an Indian motorcycle company that outsells everybody but Honda worldwide. And their products are world-class.

The Indian market has just come off a bad stretch as the recent election uncertainties and Gautam Adani's Reliance Industries legal woes haven't helped either. But the Indian market plays on a demographically growing economy, just like China was in the early 2000s. Yes, like any emerging market, there is a bit of hair on the story - high inflation and volatile politics - but that was also true of China when its markets boomed circa 2005. India now has the world's largest population, the fifth largest economy, and has just taken over from Hong Kong as the fourth largest stock market.

The secular case for India over China is clear from the chart below. The relative pullback vis-a-vis China seems complete now, and an entry point is evident now. The way to play it is through the iShares MSCI India ETF - $INDY, which tracks the 50 largest companies, or the broader $INDA - a tracker for the MSCI India market.

India vs China

The sharp pullback to the breakout levels of two years prior against the U.S. market is evident in this chart;

India vs U.S.

So maybe 2025 will again frustrate the contrarians who have unsuccessfully wagered against the U.S. Growth theme that has dominated for the last ten years. For the 'Growth" theme to take a breather, we would need to see an acceleration of global growth as a reaction to the recent monetary easings from the many Central Banks for a durable rotation to play out. We saw that in spades in the 2022 growth vs value trade ( shown below) after the post-COVID easing. I think it's a reasonable bet to make again. And like my conviction on copper as a trade for next year, global diversification into more economically sensitive equities is prudent and timely, given the expensive, extended U.S. market. Periods that follow monetary easings are good environments for cyclical risk-taking.

Time for some Hero worship, don't you think?

U.S. Growth vs Value

Risk Model: 1/5 - Risk Off

The model is stuck in the 'off' position due to a combination of an overbought market with a short-term pullback in AAII sentiment. The navel-gaze over China's economic data has also damaged Copper vs Gold, which, although recovering, is still giving a risk-off signal. Meanwhile, outside of China, the world keeps growing while the new supply of copper doesn't. I'm still a copper bull relative to gold here.

The S&P500 is in a suspended animation phase as nobody has the guts to sell and show a portfolio with too much cash after a record-breaking year. Despite being widely anticipated, the impending Fed-driven rate relief is freezing portfolio managers in their seats. Tax gain deferral is also helping to forstall any profit-taking. I think the first week of January may turn out to be a stumble out of the gate