“New knowledge is the most valuable commodity on earth. The more truth we have to work with, the richer we become.”
-Kurt Vonnegut
Amidst all of #MSM’s partisan narratives, isn’t that the truth?
Another truth is that commodities themselves had one heck of a bounce yesterday. That’s what bear markets can do – they bounce. Post Reflation’s Rollover, I guess we can call this Reflation’s Rally.
But are we in a bear market for commodities in the aggregate, or just Oil & Gas? Solving for that intermediate-to-long-term truth was a valuable discussion to be having in Texas for the last two days. On that topic in particular, some Texans have plenty of local knowledge.
Back to the Global Macro Grind…
But what does a Texan who gets paid to drill-baby-drill know about market positioning and sentiment truths that we cannot glean through a good truth-telling price, volume, and volatility #process?
Here’s the truth about Oil & Gas, across durations yesterday:
- WTI Crude Oil was +3.3% yesterday, is +10.7% in the last month, and is -16.3% for the YTD
- Natural Gas was +1.7% yesterday, is -0.3% in the last month, and is still in crash mode -29.6% YTD
- Oil & Gas Stocks (XOP) were +3.2% yesterday, are flat in the last month, and still -21.2% YTD
In the context of the Commodity Complex, that took the CRB Index (which has a heavy Oil weight) +0.8% yesterday to +5.9% month-over-month and -8.0% YTD.
Does 1-month-price-momentum matter to chart-chasers? Does a 1 legged-duck swim in a circle?
But what, precisely, other than #STPCD (short-term-performance-chasing-disorder), does 1-month-price-momentum tell us about intermediate-to-long-term TRENDs? Plenty of pundits “shorted” Tech 3-4 weeks ago when 1-month price charts “broke”, don’t forget.
And yesterday we registered yet another trifecta of all-time-highs for the Nasdaq, SP500, and Russell…
Whoever shorted the Russell because it was “breaking down” on 1-month-price-momentum in May 2017 just saw the Russell 2000 rip them for 100 handles (from 1350 to 1450) to the upside too.
To be sure, every bearish-to-bullish TREND Phase Transition in markets starts with short-term price momentum going from bearish-to-bullish. But that certainly doesn’t mean that every bear market bounce is the new bull market TREND.
So, while I respect the market’s price above most other perceived truths, I also respect the multiple-factors that drive price, including volume, volatility, research, etc.
If you look at WTI, Nat Gas, and Oil & Gas Stocks (XOP) within the context of my @Hedgeye Risk Range:
- Oil’s (WTI) immediate-term risk range is $45.13-48.56 and it remains bearish TREND
- Nat Gas has an immediate-term risk range of $2.85-3.12 and remains bearish TREND
- Oil & Gas Stocks (XOP) have an immediate-term risk range of $31.04-33.27 and remain bearish TREND
And if you then consider where volatility on these 3 things is positioned:
- Oil (WTI) has a -4% implied volatility DISCOUNT to 30-day realized
- Nat Gas (UNG) has a -4% implied volatility DISCOUNT to 30-day realized
- Oil & Gas Stocks (XOP) have a -9% implied volatility DISCOUNT to 30-day realized
You’ll see that how I define market truth is that both Oil and the stocks (XOP) are bouncing right back to the top-end of my risk range; both remain bearish intermediate-term TRENDS; and the market’s implied volatility expectation is that they don’t back off hard from here…
So, I’ll fade (i.e. do the opposite of chasing the chart) this move in both the commodity and its related equities today rather than get amped up about some said “breakout” above a 1-month-moving-average.
In sharp contrast to bearish TREND views like we have on “reflation”, we remain bullish on FAANG (and/or FANDANGO) components for plenty of #GrowthAccelerating research reasons we’ve outlined for the past 8-9 months…
But also because, using the same process/framework, major FAANG components like Facebook (FB) and Amazon (AMZN) have implied volatility PREMIUMS (vs. 30-day realized) of +59% and +51%, respectively.
The truth about those 2 stocks (FB and AMZN) is that they are “up” on 1-month-price-momentum AND up a ton (absolute and relative to “value” and/or “reflation”) at +44% and +39% YTD, respectively… and their volatility premiums are really rich relative to Energy expectations from here.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.22-2.37% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
XOP 31.04-33.27 (bearish)
VIX 9.013-10.36 (bearish)
Oil (WTI) 45.13-48.56 (bearish)
Nat Gas 2.85-3.12 (bearish)
Gold 1 (neutral)
Copper 2.68-2.86 (bullish)
AMZN 1000-1051 (bullish)
FB 158-169 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
