CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts

Takeaway: Book Some Gains on RED Short-side and look for a re-entry point.

With WTI moving in on its oversold signal, we want to book some gains short-side and outline a few upcoming catalysts that could disrupt our view (which hasn’t changed) through the end of the year.

Our intermediate-term view of 1) more deflationary USD strength and 2) Confirming market signals (PRICE, VOLUME, VOLATILITY) drives our bearish view on commodities as an asset class. With that being said, many of the tickers on our screen look oversold (Crude oil included) on the FX catalyst this week and we want to point out a few snap back risks over the next month and a half (think of them as shorter-term risks within an intermediate-term TREND view on the asset class).

With WTI moving to the bottom end of our risk range we like the idea of booking some gains short-side with the intention of re-shorting at a better price. Since the reflation trade unwind (June 10th), the market signaling taking crude lower confirms our intermediate-term TREND bias but these signals haven’t been as strong over the last two weeks.

  • Implied volatility (OVX Index) has moved higher with widening realized ranges. Higher volatility increases the range of probable outcomes near term
  • The healthy volumes and greater price semi-deviation on the down days (Target threshold of “0%”) confirm the bearish momentum over the last month and a half but these signals too, aren’t as strong
  • Consensus now expects more USD strength and pain in commodities as relative USD correlations have broken down over the last month 

CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts - Semi deviation Table

 

The table above shows that on days of negative returns since the June 10th highs (which double up down days), we’ve seen healthy volumes and more variance in price momentum (All BEARISH signals) meaning that the downside moves have been much more pronounced on average.

Most importantly, these price signals haven’t been as pronounced over the last two weeks, and currency correlations (both absolute and relative) are breaking down as expected volatility widens out: NON-LINEAR RISK.

 

CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts - Relative USD Correls

 

WIDENING RANGES: Realized Ranges and expected volatility stretching out 

 

CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts - OVX Index

 

Source: Bloomberg

 

We outlined both of the next two central planning catalysts in the Macro Show this morning:

“$USD:  Investors pushed out the dots yesterday as global growth slowing and China’s quasi-acknowledgement of economic reality pushed bets on the probability of a September lift-off back below 50% and pushed the dollar -1.1% lower on the day.  As a consequence XLE pop +1.86% to lead sector performance. Jackson Hole is the next currency catalyst, and we expect the event to be Euro bearish with Draghi’s presence.  Jackson Hole = Aug 27-29th, September FOMC = Sept 17th.” 

With the 2-step Chinese devaluation and likely Draghi jawboning in Jackson Hole perpetuating a de-facto tightening without a fed funds rate cut, any incrementally dovish move out of the Fed could unwind consensus positioning which is betting on more of the same:

 

CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts - CFTC Positioning

 

CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts - Crude Oil CFTC Sentiment Monitor

 

The most differentiated part of our GIP model right now for the full year 2015 is our inflation estimates (See below). With the relative central policy measures globally perpetuating more USD strength, expect a pushing of the dots (or an expected pushing of the dots) if the Fed starts to sniff out CPI readings anywhere in our area code ahead of the September meeting. Even so, Draghi is the near-term catalyst (unless we get more from Beijing), but the market is sniffing him out.  

 

CRUDE OIL: Quick Check-In With the Market Signals and OutliningUpcoming Catalysts - GIP model

 

Ben Ryan

Analyst

 

 

 

 

 

 


Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more