Today’s blog is detailed, but trust me, this is one of those blogs that you will want to read fully. I believe that we are on the cusp of two colossal upside trades. I believe that these trades will be, in hindsight, seen as the “big moves” in a couple of years. Bear through the details- I believe you will find that understanding the logic and timing behind these trades as very valuable. Buckle up, dear readers!
To start: Somebody posted a comment on my blog that, in a nutshell, politics shouldn’t be traded on. While I agree with that statement – partially- and will ALWAYS endorse using the charts as your key decision maker, it is a fact that many sectors / investments are massively influenced by political decisions. To name just a few: currencies, commodity prices, financials, infrastructure. As I noted to the reader (who’s comments I appreciated): You can most certainly trade against political stupidity! That is exactly how we at ValueTrend got involved in the inflation trade in 2020.
We are now looking forward to a recession trade later this year. We also see potentially huge opportunity in energy producers. Let me guide you through our past inflation trade logic to start. Then, lets look at our current recession trade logic, and our coming energy trade logic:
Here’s how our inflation trade logic worked:
If an obvious supply crunch is in the works, and you make the following observations:
- your government is putting the kibosh to energy production and transportation (pipelines) on the cusp of a known supply squeeze,
- if they are printing money (more supply) – sending it to other countries / spending it with no GDP positives,
- if they build debt, costing the country interest on that debt (requiring more money printing),
- if they are adding stiffer regulations, mandates, wage increases, and higher taxation to businesses (who pass the costs on to consumers)
- if you add new carbon taxes to the steepening cost of energy…
….you get inflation!
That’s what we were observing in 2020. I blogged about all of these factors back then – check for yourself on the search tool for this blog. The charts agreed with a commodity setup / inflation trade that was driven by the stupidity of our government. The oil chart was coming off of a washout, and breaking out. Boom! The ideal trade: political stupidity – with chart confirmation!
Here’s our view on a recession trade:
We are observing the following right now, leading us to believe that a recession is likely:
- Rates are aggressively rising as government attempts to play catch-up. This, after failing to act with tightening prudently in the early stages of inflation and supply chain issues.
- Consumerism drops. This accelerates the economic decline.
- Consumer & business confidence is dropping. As this accelerates, government will have to pull back on their monetary tightening and accept that inflation will remain higher than their 2% target.
- Now you have businesses backing up on expansion and cutting back on hiring. Slowing consumption means lower profits. Tax revenues decline, yet the debt payments linger.
So – the government reacts:
Once the late-as-always governments figure that there really is a recession, they will begin backing up their tightening-talk.
The next step is the path of lowering rates to get them out of the problem they caused to begin with.
Then they will restart the money printing machine. Deja vu!
The good news is that – once again – you can trade the stupidity. During the bear market (now) you should have defensive positions and cash. That cash will come in handy soon. Markets tend to rise as they witness the policy talk changes that I just talked about. You don’t need to be coming OUT of a recession to witness the early stage of a bull market.
IMPORTANT: The key to this year’s market strategy will be to watch the Fed and BOC for a changing monetary rhetoric. Then, look to the charts for a base, bottom and breakout – as I teach you to do in my Technical Analysis Course. Please note that the course price changes to $397 effective July 1, 2022.
Here’s our case for the energy trade
My continued argument for energy producers as a place to be comes down to common sense. Let me explain:
Before you ask: THERE ARE TWO ARGUMENTS AGAINST ENERGY
- History says don’t buy oil anywhere near recessions. For example, 2008, 2016-2018 – lots of burned fingers in the energy trade…
- Then, there’s the the ESG mantra. This says fossil fuels are toast in 5-7 years – no one will invest, and everyone KNOWS this!
So….Don’t be dumb! Buy a solar stock, or Tesla, not an energy stock! Right?
Am I crazy to buy energy stocks?
Do you want to make money now, or do you prefer to wait for half a decade?
We aren’t in a time machine. Ironically, right NOW there is a colossal energy re-investment cycle forming. According to metrics I am reading, the planet is $2-3T (that’s trillion!) below the previous 2010-2014 capex trajectory for oil, gas, metals! Meanwhile – the global population is 600m higher! Over the last 20 years, we have exported 7 million jobs out of the USA to India, China, Vietnam, Bangladesh etc.. So we have hundreds of millions of families that consumed zero fossil fuels in the last two cycles. But now, as their countries develop and embrace new found wealth and capitalism, they are consuming at an accelerated pace. And then, there’s the demand in North America and developed nations coming from the re-opening of the post-COVID economy.
All of this, in the face of previous energy infrastructure and development shutdowns. If our governments incompetence wasn’t so negatively impactful on ordinary people, I’d be laughing.
Regarding the “recession is bad for commodities’ argument, I’d like to offer one other factor to the case for oil. Similar to 2008, China has been far more accommodative than the US Fed and most other central banks. China’s re-opening + an accommodative fiscal posture is supportive for the global economy and commodities, if history is a guideline.
If the Fed backs away from its tightening policy path slightly, as I note above in my case for a recession, this speaks to a big negative reversal for the US dollar and likely upside for commodities.
Here is the bottom line:
The entire planet is craving global oil. And energy infrastructure. Suddenly, there’s a move back towards development of energy assets – after years of government suppression! They could have saved us all a whole lot of inflation if they hadn’t been so stupid to see the obvious in 2020, but if you read this blog in 2020, at least you made money on that trade.
But here we are again, energy has declined somewhat. And herin lies the opportunity – the background is set, and prices are not overbought any more (I did mention that I reduced oil a couple of months ago). There’s likely an energy trade coming soon to a theatre near you. You CAN trade against political stupidity!
Oil Flip Timeline
2020: “Oil companies, you’re all dinosaurs, we want you out of business in about 12 years, we’re actually thinking of suing you for being an oil company.”
2022: : “Why aren’t you investing in your business?”
TRUDEAU IS NOW LOOKING TO EXPAND ENERGY INFRASTRUCTURE … After 5 years of shutting it down…!!!!!!!
This is a colossal failure of common sense – and our politicians have no clue how long it will take to turn this ship around.
But that helps you and I earn some profits, methinks.
The chart must support the setup
As noted at the top of this blog, the chart MUST support the political stupidity-setup. So, lets see if it does:
Below is a longer termed view of WTIC. Energy hit $140’s in 2008. There is a big resistance lid at $110 right now that has to break in order to see that old high. We have bullish MACD, but a negatively diverging RSI. This suggests that the breakout is yet to be seen. So – recall my rules for entry on a breakout–you need a good chunk of time-minimum 3 days, up to 3 weeks, to confirm a breakout through $110. BTW–there is no reason for the 2008 highs to remain a barrier for price if the above fundamental factors remain in place.
Now lets look at the producers
The iShares XEG ETF is a good benchmark for CND producers. If Justinflation Trudeau wants to reverse his stupid decisions on capping production, noted above, Canadian producers would benefit. The chart shows us a clear move towards oversold conditions on RSI and Stochastics. MACD remains bullish. But there’s that lid again. Resistance near $18 is strong – and was tested unsuccessfully yet again recently (one of the reasons we took more than half our energy out of the platforms we manage). If we see a breakout, we’d buy. We might even attempt a trade from the oversold conditions in a month or so. But the safe bet is to buy the breakout – same rules as always (3 days-3 weeks).
There may be a massive opportunity to play a Fed/BOC policy change if/as/when the charts confirm the move, as described above. Broad markets and growth stocks would benefit most. Think technology and NASDAQ. There’s also an argument for enormous profit potential as energy producers finally get some respect.
The time to trade either of these scenarios is yet to come. But, in our view, they are coming possibly as early as this fall. As I always say: You can’t fix stupid. But you can profit against it!
I find it comical when I hear Trudeau, Biden and other leaders say renewables such as wind turbines, solar are the wave of the future. Here in Ontario MacQunity and Wynn spent 10 billion dollars to erect wind turbines and solar panels. According to ieso.ca, wind and solar are providing less than 5 percent of our energy needs. Great investment! That money could have gone to where it is really needed in healthcare. The cost to upgrade our grids to handle the electrification is like 100 billion dollars. Not sure about your audience but I am not prepared to pay more taxes to pay for this. The pipe dream of having all electric cars by 2035 is an impossibility. Our infrastructure cannot handle it, nor can we afford it. Wake up people oil and gas is here to stay. There are no affordable alternatives.
So that’s 100B divided by 36M population divided by 10 years divided by 12months = 23$ per month or less than a Tim Hortons cup of coffee a day to bring you green infrastructure.
1. Mr Nuttall of NinePoint game keeps flogging the ‘Global spare capacity is low”.
Recently I read Canadian oil inventories are at record highs about 2019 levels.
The spread between WTI and WCS are widening suggesting oversupply.
Crude from Mexico & Venezuela is competition ( not available during covid) bound for US markets.
Canadian producers export 80% to US Markets. If all of the above is true it seems uphill to me.
2. My energy stocks have been hammered. Why did you only sell half of them when you had the chance?
Hi Mark- I don’t know Ninepoint game so I am unfamiliar what he said or who he is .
The issue is that inventories will NOT keep up based on the statistics I note. More users, more use = inventories drain. Its not about the “immediate” now. Its about the storm that is clearly coming. Ironically, with record inventories–Canadian gas prices remain high. Hmmmm…
We went from pushing 20% energy to 7% energy. We rode the wave from late 2020 to now, making strong gains on these stocks. The pullback is relatively low, particularly in the 2 stocks (7%) we held after taking profits on others- they’ve pulled back but we remain up quite significantly. The pullback is sharp and makes sense, but not alarmingly deep (take a look at the chart if you think it is a “hammering”). Next – you need to understand that in investing, there is no absolute. But more important is the essence of an investment plan: Nobody actually KNOWS what will happen. Its all about probability. So, if I view energy as a good 1-2 year trade as I did 2 months ago and I do now, but view the probability for a pullback as reasonable–we take an overweight position down, but don’t eliminate it. After all…it was never an absolute guarantee that the energy stocks and oil wouldn’t break through resistance. No crystal ball here.
I talk about a number of rules in my Online TA Course. If you have not enrolled, you might benefit in understanding how to accept the psychological side of trading (acknowleging you dont know, you only trade the odds) along with the principles of legging in/out and positioning.
Appreciate your report and enthusiasm.
The article supports an energy trade following a breakout using WTI, XEG.t as potential guides.
At the end of the article you talk about a tech trade,
(..” Broad markets and growth stocks would benefit most. Think technology and NASDAQ. There’s also an argument for enormous profit potential as energy producers finally get some respect.”)
Can you help me by explaining where the tech piece fits?
I thought this was an oil trade bull case.
Lance there are TWO trades here. First, the “recession trade”. That is, when market participants spot Fed/BOC talk basically suggesting that inflation is coming down AND they will raise/tighten LESS THAN THEY HAVE BEEN –YOU SET UP FOR A MARKET POP. So I mentioned that the way to play that recession trade is to buy broad markets and technology. Why tech? Because it has been the most hammered sector, primarily because tech and growth stocks are levered–they borrow in order to continue expanding. Rising rates hurt them. Falling rates help them. I know you have followed my blog so you heard me say this 2 years ago- that is, stay out of tech. Remember me harping on and on about getting out of tech and growth as rates rise to fight (the then not-acknowledged) inflation? Well, if the REVERSE happens to rates, they are the most levered to benefit. Its all about beta if the market pops–and growth/tech is high beta.
Gotcha! I get the tech thesis.
And the oil thought sounds more long term and fundamental. Nutall would like your call there.
I do remember you banging the drum loudly on value plays and oil – it was an $80 oil target back then and I believe it was in September/October of 2020 you really reminded us.
Vaccine news came out from Pfizer and value really started to move!
I wish I had seen more past cycles and been better able to understand the rates phenomenon.
Put it this way, I was in on Facebook at $340 and PayPal at $120 in early 2022 – that was clearly not the bottom I had narrowed in on.
I had no idea how powerful a move these growthy names were going to take when rates started to move up.
I’m only 39 but do not like the volatility; however, I am going to wait for the trend to change and growth to pop, rather than selling now out of fear.
For your growth stocks it may be a number of months away, but I am convinced that once the Fed hints or says they are lowering rates due to recession, that will be their cue. Also–not sure if you watch my videos but I dedicated a video to tech sector recently, focusing on an interesting trend in insider buying within the sector.
Meanwhile, it may be much sooner than I suggested before the energy stocks start to move up again
Very helpful article Keith, as usual. Will the bond chart eg. TLT, ZTL, etc give us an early notification of what the Fed/BOC will have to do before the central banks even signal it? They seem to be always always always behind the curve so I am wondering if the curve in this case will be the bond charts making a low then reversing?
Great question Gary–the bond market is considered “smarter” than the stock markets. Far less emotion, due to the bond market pro’s pricing based on data. This -vs stock markets which tend to trade freely by more unsophisticated investors, thus reflecting rumor’s, hope, fear mixed in with hard data and reality….. all rolled up into one.
The bond market has a history of spotting changes ahead of time. So yes, you will likely see some action in bonds prior to or at least at the very early stage of the recession-trade pop I talk about.
An alternative view on bond prices is that it is simply a function of supply (lots of it) and demand.
Great blog Keith, I appreciate the time you put into your messages and look forward to reading them.
If the coming reason is strong enough would oil not move down a lot with decreased economic activity?
Yes, as noted in the blog that is a potential, but the argument for increasing world demand in an environment of decreasing supply –even if that demand falls in recession, it is increasing overall through the world per developing nations who are not buying Tesla’s, while supply is shrinking faster than demand might (Russia, etc)