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Trading the Trend

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Further evidence of the gradual rotation. Now a rotation does not mean the hot sector simply stops performing, more that it slows and other sectors catch up a bit as the overall market balances out.



jog on
duc
 
The inflation trade:



It can be seen that gold moves inversely to the yield. If there is inflation (PPI) and the Fed. does not peg the yield, then yields will rise and gold will fall. Gold will fall (initially) far faster than stocks. If yields ratchet up much past 7% then stocks will have serious issues. Except financials. Financials do pretty well in higher interest rate environments.

Now I don't see much if any inflation before next year, when, possibly POO rises on supply issues into returning demand. Clearly from the oil patch news we can see that supply is going to be constrained. Demand will pick up. Where all that settles out in POO is probably $60/$70. The issue is if there is 'something' that creates a price spike. Even if there is, I don't see it being of long duration, there is still enough swing supply to bring it back down.

The other issue for gold (although no time soon) is when rates are raised by the Fed. The increments will be 25 basis points and spread out. Baby steps. Stocks (in 2018/2019 threw the 'Tantrum') but stocks can absorb up to 5% with no issues, except some of the real overvalued stuff (tech) might have tumbles. Gold however is currently priced for perfection, which is ZIRP and NIRP.

I actually (love) gold and silver. The physical. Not the paper. If there is a monetary armageddon, good luck on getting delivery of your physical, or the output from your mine or whatever. You want it where you can physically control it. Not where you are relying on a 3'rd party. How much do you think you would actually need? Probably not as much as you might think. The stuff is only to facilitate exchange. As long as you have some, you can earn more. Of course if you are simply trading it, ignore all of the above.

jog on
duc
 
Pretty quiet day.



All the action is in the Fixed Income markets, where, from mid-curve we have had (pretty much) a 25 basis point move. This is why gold/silver are spooked currently.



This is (really) the first twitch of the market since Feb. of any indication of inflationary issues. Then take a look at the sector ETFs and see which ones held their ground today. It will be interesting now to monitor the FI market much more closely going forward.

jog on
duc
 
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Now the 'stagflation' meme:



Now, CPI prices mean very little to zero re. inflation. PPI prices are the driver:




PPI pressures are mounting. This is why last week we had the 25 basis point move in the long end of the curve. Hedging PPI inflation with PMs is a total waste of time unless, the Fed. manages the long end of the curve as they did in the 1940 period for war production.

Given that 1 of the primary mandates is that the Fed. lean against inflation, management of the long end is out of remit. However given that the Fed. has already been colouring well outside the lines, it is not beyond possibility.

From a perspective of: will the POO rise? Almost certainly, once you take into account the damage done to productive capability from the Arab's price war. My guess is it will settle at $60/$70 barrel. But it could spike in the short term higher. Now you get a situation where CPI inflation will run slower than PPI inflation. This is a profit margin compression the wrong way. Corporate earnings are squeezed. The market does not like Corporate margin squeeze. Hence, the Fed. will allow the long end to adjust to market forces. Market forces will see higher yields at the long end.

Some sectors love higher rates (Banks) some sectors hate higher rates (Gold/Silver). Some are up to a point, indifferent. That point is probably a 5% yield. After that, most sectors will fall. A quick research of the 1970-1982 period will disclose which sectors thrive, survive and die.

jog on
duc

 
So lots to think about on a macro basis.



Chart 1. Bonds (always) turn before stocks. The turn was already present earlier in the year. The signal was simply muted by COVID and all the nonsense that has engendered. Notice the early signal in 2007/2008. Plenty of time before a signal triggers currently (you would think). I have already acted on the signal going short the 20yr last week. Largely because it could well be the 'top' for Bonds and going short today, limits my downside even if nothing much actually happens going forward.

Chart 2. Obviously the US dollar falling, makes commodities more expensive. This is the PPI signal. This is also why Silver joined the Gold party. Obviously we need to keep a close eye on developments here. If we head towards and go through that second green line, well things will be hairy and much will depend on interest rates at that point (whether they rise and put a floor under the dollar).

Chart 3. Commodities are historically speaking, horribly underpriced, which is why the disinflationary trade has been so dominant. They are rallying, how far they will rally is the question. I would 'expect' back towards the trendline, given the level of supply destruction (production) in the oil patch. At some point, we know demand will return.

No single chart is determinative. They all interact together. When they all confirm the same story, time to sit up and take notice. They are currently all confirming the same story. We are only at chapter 1. Do we move to chapter 2? We'll see. I'm starting to think yes.

jog on
duc
 
The slow roll:



Financials, Con. Staples, Utilities and Industrials generally pay dividends. Tech. generally does not. We have seen from historical return on indices that dividends contribute an important part of that return. Assuming that you are not chasing the latest growth stock, the above sectors will be of interest and why the market is gradually rebalancing. This is particularly true when you look at the following"



Bonds at the long end are repricing for possible PPI inflation. Stocks that pay a dividend compete with this area of the market.

Meanwhile:



The consumer indicates that he is not (recent past) without spending power. Now of course it would be far more informative to know what areas exactly they are spending and you can dig into the releases and find out. You can also look at various market sectors and infer from that.



jog on
duc
 
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Next 2 charts are interesting however they do not explicitly examine the effect of interest rates on the dollar. Interest rates have trended lower since 1982. However, while they have trended lower, there have been periods where they rallied higher. That information has not been made explicit in the following tables.



jog on
duc
 
Oil patch news:



Weekly U.S. gasoline demand plunged by 1.9 mb/d in April, and then bounced back by 1.3 mb/d in May.

- As gasoline demand bounced back, refining margins for gasoline rose too, prompting refiners to switch their mixes back towards gasoline.

- Jet fuel refining margins have plunged and not rebounded, however, incentivizing the blending of jet fuel into distillate fuel.

Market Movers

- Hess (NYSE: HES) is laying off 10 percent of its workforce after posting its fifth quarterly loss in a row.

- U.S. BLM approved ConocoPhillips’ (NYSE: COP) drilling plan for the National Petroleum Reserve in Alaska.

- Total (NYSE: TOT) and its partners have launched the third phase of the development for the Mero oil project in the Libra block off the coast of Brazil. The Mero 3 is using a floating production storage and offloading vessel and is expected to come online in 2024.

Tuesday, August 18, 2020

Oil prices rose to a five-month high this week on hopes that the economy is reviving. New coronavirus cases have fallen back in previously hard-hit states such as Florida and Arizona. At the same time, the U.S. shale industry is not rebounding, adding to bullish momentum on the supply side of the equation. Prices fell back in early trading on Tuesday.

Trump admin approves Alaska drilling. The Trump administration approved an oil leasing program for the Alaska National Wildlife Refuge (ANWR), opening up 19 million acres of wilderness for drilling for the first time. The Interior Department is aiming to finalize the process to make it difficult to undo if the election results in a change of administration. However, investors question the profitability of the enterprise, and several major banks, including Goldman Sachs and Wells Fargo, have ruled out financing any ANWR drilling.

California warns of blackouts amid heatwave. California warned of widespread power blackouts on Monday amid high heat and humidity. The state’s large portion of renewable energy posed challenges to grid operators during the latest heatwave. But the grid operator canceled the blackouts Monday night as the disaster seemed to have been averted.

Chevron in talks over Iraqi oil field. Chevron (NYSE: CVX) is in talks with Iraq over a potential investment in the Nassiriya field.

Automakers ink deal with California on emissions. Five automakers – Ford, Honda, BMW, Volkswagen, and Volvo – signed a deal that binds them to meet strict state standards on fuel-efficiency requirements. The deal is stricter than the Trump administration’s lower federal fuel economy standards and could have a far-reaching impact because 13 other states follow California. The California standards require average fuel economy to rise from 38 miles per gallon today to 51 miles per gallon by 2026. The Trump standard only requires 40 mpg by then. Still, the California agreement is slightly weaker than the original Obama-era rules.

Refiners retool amid demand uncertainties. Phillips 66 (NYSE: PSX) said it would retool its 120,200 b/d Rodeo refinery in California to use renewable fuels and that it will shut its 44,500 b/d Santa Maria refinery. Valero (NYSE: VLO), Marathon (NYSE: MPC), and HollyFrontier (NYSE: HFC) also have plans to boost renewable fuel refining.

Chaparral Energy files for bankruptcy. Oklahoma City-based driller Chaparral Energy (NYSE: CHAP) filed for chapter 11 bankruptcy protection on Monday.

China buys more oil from U.S. China is buying 14 million barrels of oil from the U.S. next month to comply with the Phase 1 trade deal signed earlier this year. Those volumes are set to be double the amount purchased in August.

Oil exploration coming to an end. Faced with pandemic-driven demand destruction and a relentless call for climate-conscious and ethical investing, oil executives are resigning themselves to the uncomfortable fact that a significant amount of their vast oil and gas reserves will end up totally worthless.

Bank of America: Oil to hit $60. Bank of America expects oil prices to recover to $60 a barrel for Brent crude in the first half of next year thanks to shrinking global inventories and prices improving faster than previously expected.

OPEC compliance hit 95% in July. OPEC compliance with the production cuts reached 95 percent in July. Also, Nigeria and Iraq are expected to cut their production by another 114,000 and 400,000 bpd, respectively, in August and September to compensate for lagging performance in prior months. The success of the deal is notable. “However, in reality, they are likely concerned that it is taking longer for storages to see some material level relief, while the price recovery the alliance was hoping for is also pushed further in time due to the pandemic’s persistence,” Rystad Energy said in a statement.

Elon Musk becomes the world’s fourth-richest person. Elon Musk gained $8 billion to become the world’s fourth-richest person after Tesla (NASDAQ: TSLA) shares surged 11 percent on Monday.

Guyana cancels oil tender. The new government in Guyana canceled a tender for a one-year contract to market the government's share of Liza crude from the offshore Stabroek block. “We made it clear in the campaign that companies should not be submitting bids to an illegal government that was there at that time,” Vice President Bharrat Jagdeo said, referring to deals signed during the five-month political impasse.


jog on
duc
 
Refinery output is interesting.
Post covid jet fuel snashed but gasoline aka usual car transport back while diesel heavy equipment mining farms and freight remained unaffected alk along
Actually quite positive except for air travel
 
Same goes with ethanol - just as much corn has been planted but low demand for biofuel means a big glut of corn.

But most corn is eaten by things which people eat (cows, pigs etc) so all the farmers can expect cheap stock feed
 
So just found a bit of time to update some charts. They are all telling pretty much the same story: a short term pullback over the next couple of days to let the market consolidate for the next push higher.



These are all essentially daily charts (short term) and will (or should) settle.

There are now inner and outer bands on some of the charts. They are the lower volatility support/resistance lines. As you track volatility lower (or higher) so you contract or expand your support resistance levels (BB type of thing).

The other factor is the hybrid market with the FAANGs (or whatever they are now known by) representing 1 area of the market and pretty much everything else the other part. So on this pullback I would expect greater declines on the FAANGS and slightly less on the other sectors which have already pulled back. We'll see.

Nothing too much happening in the stagflation front currently. I'll look at that again at the w/e.

jog on
duc

 
So update:



I would expect Vol. to conform to the trendline and settle, which means, we settle and move higher again.



Confirmed by NYMO



Contradicted by TRIN.



Both the 20 and 50 are sitting at levels that could move higher.

In summary, I would be expecting a resumption of the trend higher. We may have some opening weakness which should resolve into the close. If Vol jumps higher through the trend line, then we will need to re-assess.

And NVDA



No longer just for games apparently.

jog on
duc
 
I explained that when I told you I'd bought it.
 
Here's some trend for you:

Three weeks after the big unemployment payments ended and the expected stimulus package didn't happen:



The jobless claims number(s) now start spiking:


And the market starts to nosedive literally the day the data comes out:


Wow, how unexpected!


However, this has also caused a drop in the exchange rate, which was just pulling hard almost every day until now:


In fact, expect plenty more of this until the logjam is broken. Depressingly, these spike(s) in numbers might be the catalyst that forces the politicians to finally get something done, but if my gut tells me anything here, it's that things are going to once again have to get a lot worse before they get better (i.e that the powers that be actually do something).

This becomes a doubly strong suspicion when I think about the fact that it's election season and torpedoing the economy might be a hell of a tactic to get trump ousted. I wouldn't put that past the democrats at ALL.



A drop in the U.S markets combined with a commensurate drop in the exchange rate (it's depressing how much the two have tracked each other over the past few months) means that I now torch most of my positions and simply hold USD.

Most of my position is now effectively a forex trade.
 
Any news on the American 2nd stimulus, could be the catalyst for a wet blanket on the dow the next few days if they dont approve it?
I thought Congress were in recess next week? I'm not sure need to look in to it
 
I keep getting the overwhelming impression that they're trying to torpedo the economy and get trump blamed for it.
 
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