October 10th — Bulls and bears are now faced off at the line of scrimmage. Bulls still have the ball, by dint of rising moving averages, the major indices within sprinting distance of new highs, and constructive patterns still intact on the weekly charts.
But the quarterback got sacked on Tuesday as the crude oil strong safety rushed in for a hit….
Small caps also look notably weak, a point of concern as growth high flyers and “nifty fifty” type stocks — the names that populate IBD and Stocktwits 50 lists — show signs of speculative retreat.
Meanwhile the US dollar is threatening a resurgence — a “risk off” event when such occurs, as the dollar finds strength in capital repatriated from E.M. assets and new liquidity flows into safe haven USTs…
On the bullish side of the ledger, we are seeing very constructive action in oil and gas names, as demonstrated in charts like that of Hess Corp (HES) below. Natural gas has shown clear sign of putting in a long-term bottom (as noted by our friend Peter Brandt) and crude oil is showing signs of recapturing a “fear premium” as geopolitical concerns over Iran / Syria heat up.
Energy names are thus potentially attractive as a go-to area of capital rotation because
- They can win if crude oil rises on geopolitical concern
- They can win if the $USD continues to get debased (commodities priced in dollars)
- Reasonable valuations can still be found…
In contrast to the above favorables, multinational blue chips look overextended and vulnerable… if crude oil rises on geopolitical concern, higher fuel costs will act as a deflationary tax of involuntary nature. If the dollar rises on “risk off” correlation and/or global slowdown, multinational profits will be hurt (as overseas earnings power is boosted by a cheaper dollar). And of course, this “no brainer” area of the market may have become significantly overbought… and could thus be subject to significant capital withdrawal on a risk-off flowback to treasuries…
On the long side we have an attractive roster of oil and gas names, with almost all our bullishness concentrated in this space. On the short side we have REITs (another overdone ‘hiding place’), semiconductors, and multinational blue chips for reasons as outlined above… all positions real money and execution time-stamped in the Mercenary Live Feed.
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