The hated rally

It has been a much hated rally since January which should have seen enough bearish sentiment capitulation to potentially lead to weakness from current overbought conditions. Did it commence on Thursday in the U.S.? I will not go into details about why the May to November six months are often weak both in U.S. and Australia but point out stats at least in the US over the last 60 or so years are pretty compelling when the year is carved up into these periods. However, there are also some sound theories as to why this occurs. Combine that with the self-fulfilling factor, a market that has surged into April month end, and a market that is overvalued on many fundamental measures with poor market breadth and it becomes easy to take some chips off the table right now via the U.S. market as I just have. My cash equivalents weight (34%) is the highest it’s been since earlier in the year, and my equities weighting is quite low now as I have more exposure to commodities since. So I am quite defensive again, which is a change from recently having a suspicion stock markets could be dangerous to short as we go through to the end of April.

This week I shorted the Dow Jones September contract at an average of 17,740 (probably equivalent 17,900 actual index), for about 8% of the portfolio, and have a stop at 18,900 in that contract. There could be plenty of stops close to the all-time highs so hopefully that gives me some buffer if we see a little short covering.

Since the blog started I have had a suspicion Oil may form a bottom and now it has been climbing for 3 months or so and poking above the 200 MDA. Whilst I didn’t go seriously long at the bottom I felt it was better to slowly accumulate and upon stabilization and a rising trend there will still be plenty of time to profit. This is exactly how I played the gold sector which has worked extremely well in the last year. I do have some energy plays in the portfolio but dips in the oil price or related stocks I see as generally being opportunities to buy. My bullishness doesn’t extend to bulk commodities which I see as more correlated to global economic growth where the expansion is long in the tooth and lacklustre. Also with central banks either running out of bullets or if they have bullets the tools are now blunt, I don’t want to bet on strong growth around the corner. Silver has finally had a good week or so and significantly outperformed Gold. In the last fortnight Gold up just 3%, Silver up over 10%.


2 thoughts on “The hated rally”

  1. What are your thoughts on impact of an oil rally on the DJIA? Positive or negative? Exxon and Chevron are only 7.5% market weight. Others (boeing, dupont, 3m 14%) would probably be negative.

    1. It is certainly a little different to what we saw as the oil price plunged below $30 in January, clearly a negative for markets at the time as it was creating in particular a lot of nervousness in fixed income high yield markets in the U.S. Now we are having a stabilization of these fears as it is going up so I would say it is positive. If oil was to continue up to $70 then it probably starts to get to a level that most feel is unjustified and a handbrake on the economy, at that point it would be negative for stocks perhaps. That might seem strange me saying that when I am bullish oil and bearish the U.S. stock market. It is just one of many factors though. Also I suspect just in the short term the oil price could weaken anyway.

      If we see oil continue up I believe other factors could be more important for the stock market. The worrying issue for me is the lack of earnings momentum in the U.S. versus the stock price rises and buybacks. I.e. It has been a big P/E expansion story the last few years that doesn’t give me much confidence.

      It’s an interesting point you make though as the way I have thought about it is probably a little different than how you break down some of the DOW weights, which also makes a lot of sense.

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