From the desk of Steve Strazza @Sstrazza and Ian Culley @Ianculley
We held our October Monthly Strategy Session last night. Premium Members can access and rewatch it here.
Non-members can get a quick recap of the call simply by reading this post each month.
By focusing on long-term, monthly charts, the idea is to take a step back and put things into the context of their structural trends. This is easily one of our most valuable exercises as it forces us to put aside the day-to-day noise and simply examine markets from a “big-picture” point of view.
With that as our backdrop, let’s dive right in and discuss three of the most important charts and/or themes from this month’s call.
1. Reading The Texas Tea Leaves
Yesterday we had another significant development for risk assets as Crude Oil broke to its highest level in six years.
This time seems to be different for the energy complex from the point of view that it is not only crude oil and its derivatives pushing higher like it was this summer. This time around, energy stocks are rallying in tandem, supporting the commodity’s price action.
And don’t forget rates above 1.40% is a big data point that benefits cyclical groups. This also wasn’t the case last time crude tried to take out its former highs near 76.
We’ve also seen energy-sensitive countries trending upward across the globe, such as Russia and Saudi Arabia.
Interestingly, this has occurred while the dollar has been trending higher as well. That’s not something we see everyday. You can read more about this topic in today’s currency post.
Based on the current weight of the evidence, we have little reason to doubt this move in crude oil. As always we want to see some follow-through from price to confirm it, and as of this writing it looks like we’re getting just that.
The pieces continue to fall into place for the reflation, global growth, and reopening narrative as the bulls continue to steadily put points on the board.
But there are certainly still plenty of things missing…
2. Looking To Copper For Confirmation
One of the things catching our attention is the lack of confirmation from Copper.
While Crude Oil is making new highs, Copper is testing its year-to-date lows, and looks vulnerable to break to the downside.
JC wrote about this on the blog today.
We’re wondering whether this is a major head & shoulders top or just a continuation pattern that will resolve higher, in the direction of the underlying trend?
Our bet is on the latter as long as these recent breakouts in crude oil and rates hold.
We want to pay close attention to what copper does from here, as a resolution in either direction will provide us valuable information and have a serious impact on risk assets.
3. A Resurgence From Risk?
One of our favorite risk barometers is the Australian Dollar – Japanese Yen.
AUD/JPY stopped going down and has been showing resilience in recent weeks.
Another risk-appetite indicator we pay close attention to is the High Beta vs Low Volatility ratio. And that’s also catching a bid lately which is very constructive for risk assets.
When we take a step back, this makes plenty of sense as SPHB holds a lot of those same cyclical and value stocks that we anticipate to be beneficiaries from an environment where rates are rising again.
Basically, if these charts are resolving higher it’s pretty likely that stocks and commodities are continuing higher with them.
Animal spirits are typically alive and well in markets where things like AUD/JPY and SPHB/SPLV are trending higher. For this reason, we’ll continue to monitor them closely for clues as to when and where the next move for risk assets will be.
Those are some of the main takeaways from this month’s strategy session.
Thanks for reading, and please let us know if you have any questions!