Make no mistake; we are bearish on Oil and Gas over the longer term. The longer-term price trend is still on the downside.
This is on the back of a recessionary theme and global demand destruction.
As of now, the market rally is still fueled by the "Fed Pivot" expectation. The credit market is fighting the Fed, sending the yield and the dollar to the downside.
Gold, commodities, and Crude are beneficiaries of such market behavior.
The dollar index has been down for four consecutive months.
In the same period
Gold has been green for three consecutive months
Iron Ore futures are also up for three consecutive months
Copper futures are also up for three consecutive months
This makes Crude the lagger.
However, given that we have monthly candles supporting at $80 per barrel, there is a potential for a short-term upside toward $95-$100 before the market realizes how shitty the economy is.
We do want to emphasize one thing. Fed Pivot Rally only works if the Fate hike can bring inflation down without sending the economy into contraction. This requires the underlying economic conditions to remain strong. We have two sets of data that show the manufacturing and service sector have gone into contraction. Unfortunately, most folks do not understand that the unemployment rate is a lagging indicator; it is a symptom of sickness, and the sickness is a recession. You must get the sickness first to experience the symptom. Saying the unemployment rate is low hence no recession risk, is like saying, "I'm not coughing right now, so that means in the future I will not get covid19 ."
Now let's look at a proper Leading Economic Indicator: Building Permits.
Noticed how Building Permits peaked in Oct 2005 and dived to the bottom in Jan 2009.
If you look at the Unemployment rate in Sep 2006 and conclude that the economy is great because of the low unemployment rate, that would be a grave mistake.
We will skip the 2020 Covid19 data as Federal Reserve was quick to come to the economy's rescue hence skewing the data.
Building Permits peaked on 01 Feb 2022, and it is heading down at an alarming pace. The unemployment rate remains low because it is a lagging indicator. Other leading indicators, such as Manufacturing and Service Business activities, are diving as well.
So how does this lead back to Oil and other commodities?
Oil can maintain an uptrend if the underlying economy is strong enough to warrant the demand. Thus any rally in oil right now is in the hope that Fed can achieve a soft landing and that the aggregate demand will return without sending inflation back into the stratosphere again. Now that is a tall order and is highly improbable.
All this is to say, let's take advantage of the commodities' upside while it last before the reality kicks in. Do not overstay your welcome.
You may also consider the Material Sector, which benefits greatly from the dollar downside.
Do note XLB is now considered slightly overbought. Unless you are good at picking individual material stocks, you may want to wait for a retrace.
This is precisely why we pick Oil, as it is the lagger.
We will be looking into shorting Brent again in the future.
This is on the back of a recessionary theme and global demand destruction.
As of now, the market rally is still fueled by the "Fed Pivot" expectation. The credit market is fighting the Fed, sending the yield and the dollar to the downside.
Gold, commodities, and Crude are beneficiaries of such market behavior.
In the same period
This makes Crude the lagger.
We do want to emphasize one thing. Fed Pivot Rally only works if the Fate hike can bring inflation down without sending the economy into contraction. This requires the underlying economic conditions to remain strong. We have two sets of data that show the manufacturing and service sector have gone into contraction. Unfortunately, most folks do not understand that the unemployment rate is a lagging indicator; it is a symptom of sickness, and the sickness is a recession. You must get the sickness first to experience the symptom. Saying the unemployment rate is low hence no recession risk, is like saying, "I'm not coughing right now, so that means in the future I will not get covid19 ."
Now let's look at a proper Leading Economic Indicator: Building Permits.
Noticed how Building Permits peaked in Oct 2005 and dived to the bottom in Jan 2009.
If you look at the Unemployment rate in Sep 2006 and conclude that the economy is great because of the low unemployment rate, that would be a grave mistake.
We will skip the 2020 Covid19 data as Federal Reserve was quick to come to the economy's rescue hence skewing the data.
Building Permits peaked on 01 Feb 2022, and it is heading down at an alarming pace. The unemployment rate remains low because it is a lagging indicator. Other leading indicators, such as Manufacturing and Service Business activities, are diving as well.
So how does this lead back to Oil and other commodities?
Oil can maintain an uptrend if the underlying economy is strong enough to warrant the demand. Thus any rally in oil right now is in the hope that Fed can achieve a soft landing and that the aggregate demand will return without sending inflation back into the stratosphere again. Now that is a tall order and is highly improbable.
All this is to say, let's take advantage of the commodities' upside while it last before the reality kicks in. Do not overstay your welcome.
You may also consider the Material Sector, which benefits greatly from the dollar downside.
This is precisely why we pick Oil, as it is the lagger.
We will be looking into shorting Brent again in the future.