Since the Election Day, before Biden took oath as President, the markets have been rising without much of a correction. The anticipation of continued easy money and a massive agenda to fund Biden’s clean energy ideas propelled this 40% smooth up move in equity prices. As I outlined many times before, the 45 degree angle look that you had in the trendline is one of the best you could have found anywhere.
However, that got dented in September. After the S&P 500 made its high on Sep 02, subsequent move ups had failed to make a new high. Finally, the markets closed 4.8% lower from where it started for the month breaking below the trend line.
Many fundamental and sentimental factors contributed to the technical break down. Firstly, the Fed was setting expectations for a change in policy direction. Secondly, we had big issues in China, which I think will still remain contained in China but spread ripple effects for the global economy. Thirdly, we are still dealing with the uncertainty surrounding the debt ceiling and waiting for better clarity from Capitol Hill.
So with this trendline breakdown, are we done with the upside and now we can sell the market short? I don’t think so. Actually the market went back exactly to test the break of the trendline in case if there was any unfinished business there and is turning down again.
This gives more credibility for the break down. Going back through almost 80 years of data we have a 10% decline in stocks, on average, about once a year. The 200 day moving average which normally acts as a dynamic yearly trendline comes in at a 9 pct correction from the recent top. There is a good chance that these levels will be tested. So I think one should start buying around those levels.
My main argument for further rise in stocks is the pending $4.8 trillion of additional fiscal spending bill that Biden will try to get across the line. With the sea of liquidity that we already have, this is lot more money. Though the bill is facing big opposition, the pro-climate change cabal is so strong that they will get this done. Only time will tell if it was a good decision or not.
While equity markets are stalling, the commodity markets have taken off - especially the energy sector. When Biden took office I’d strongly recommend to buy oil. We called it the “no brainer trade”. I’d suggested to buy more of it on every correction. With the melt up in prices, crude oil broke above critical resistance at $77 and traded above $79. There is more to come. I think we should be prepared for $100 in oil. The record prices are reflecting a combination of the war on fossil fuels, meeting supply chain bottlenecks and a ramping of global demand as the world is moving out from the depths of the pandemic.
It is not just oil. Global demand for natural gas and coal is now higher than pre-pandemic levels. Natural gas has more than tripled from the pandemic lows and coal has risen more than 25% in two days. All this is causing more demand for oil. OPEC and Russia are loving it too. In an OPEC meeting couple of days ago,they chose not to take any measures to curb prices.
So, while we are in a very unsettled world, opportunities abound in many a nook and corner.
So, there we go. Thanks for reading Breezy Briefings. If you enjoyed this, I'd really appreciate if you could take a second and tell a friend. Honestly. It makes such a big difference.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.