The bullish narrative coupled with the soaring asset prices, of all types, has the world thinking bubble. It’s hard to argue against that when lumber prices are off the charts, gasoline is up the most since anyone can remember, most homes for sale wind up in a bidding war where cash wins the game, and indexes worldwide are notching new highs almost daily. As they say, a picture is worth 1000 words: Look at the Lumber index compared to the S&P 500 ETF or SPY, WOOD the Timber ETF, and CPER the Copper ETF:
The S&P 500’s return of 38% looks paltry compared to lumber’s 216% run.
A glance at the Lumber index also helps put things in perspective. The breakout occurred between June and July of 2020. Ok, maybe the lumber index wasn’t on your mind, but the migration out of cities nationwide due to the pandemic and the lockdowns was in the headlines and on TV constantly. Major news outlets were reporting on this for months. Realtors, mortgage brokers, appraisers, and home inspectors were in high demand. Existing homes were short in supply and were being bought sight unseen and new homes were being put under contract in the same fashion. Sticking to this theme of lumber and new home construction, the best defense is sometimes a very strategic offense. So the paper and forestry industry would be the logical place to look when a major component of a new home starts to soar in price.
Here are the top two industries on Chaikin according to the Power Bar ratios:
And here is a small-cap name that absolutely rocketed higher due to the increased demand on their products, RFP, Resolute Forest Products. I won’t break down the chart for you but three things stand out. One, the Chaikin Power Gauge Rating changed to Bullish at the end of June 2020. Two, the relative strength indicator went from bearish to bullish on July 21, 2020 with the stock at a very low price of $2.66. I understand that this is a very small company that might not have been on your radar, but the fact remains that this company had a major tailwind which resulted in its stock climbing to more than $16 a share. That equates to a more than 5 times return in which the repeatable approach we teach would have helped you locate this name. I’ll get off my soapbox in a minute.
There are opportunities like this in every market environment. Think outside the box and pay attention to the news that is constantly being reported. There are returns to be had if you look down the supply chain of whatever the industry is benefiting from a hyper active consumer.
I wanted to point this out as a lesson for future opportunities. It does and will probably continue to happen, where we see a trend that is headline news continue to play out over a longer period of time, and beneath that trend are companies, who have stock, that you can find.