Don’t miss the opportunities in natural resources

While investors have been focusing on the strengthening U.S. market, we’ve also kept our eyes on other improving indicators happening in resources, Europe and emerging markets. These places may not be as widely popular, but we believe investors can benefit greatly from taking a view that’s different from the ones observed by the majority.

No one would disagree that Warren Buffett, a famous contrarian, has been very successful by going against the herd.

A key is in identifying strengths early and using math in your favor. We’ve discussed many of these patterns before:

Consider the leadership change in stocks that took place earlier this year. During the last week in April, you’ll recall that U.S. equities bounced back after suffering the worst losses of the year in the previous week, with certain companies taking the lead. Here were our observations from the week’s performance:

“Cyclicals rose this week and noncyclical areas were the laggards, which is a change from recent trends. We potentially could be at an inflection point, as defensive areas such as telecom, staples, healthcare and utilities have outperformed by a wide margin in recent months and mean reversion may kick in as expectations got too lofty for defensives and too gloomy for cyclicals.”

The chart below shows this turn in the market. Until April 23, cyclical sectors were losing strength against defensive areas. Since then, cyclical stocks have been gaining strength and while the path has experienced the occasional stumble, there’s clearly a rising trend.

Also consider China’s government manufacturing purchasing manager’s index (PMI), which rose for the third month in a row in October. Earlier this year, the survey sample was enlarged from 820 to 3,000 companies, so this PMI is generally a good indicator of China’s overall demand.

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