The Seven Day Scope (Snipers Only)
“Remember that stocks are never too high for you to begin buying or too low to begin selling.” -Jesse Livermore
First off we had a great discussion on this topic today live on Twitter, Facebook and YouTube. With Steve Strazza, Kashyap Sriram and I.
It is incredibly important to understand where you are at in the cycle. As I mentioned earlier this week, it might be boring. It would be a lot more fun and to identify new trade ideas and buy calls or puts and talk about crashes! However this is not how money is made.
As a fund all I am trying to do is produce returns and manage risk. That is it!
2020 was one of our best years at the time. 2021 I had a 179% return on the year. The way I create these returns (also not every year is going to be like that these are outliers) is by understanding how I should be positioned. I bring this up because we shifted from regime, to regime and to a new regime during that time.
My job as a trader is to position myself well for my next opportunity. See where the cycle is headed. Take new signals in those sectors, commodities and countries as they come in.
I take the trades when the probabilities are on my side and the probabilities are on our side in these areas.
Energy-In the past three years, we've seen a significant increase in industry returns after they plummeted to zero during the Covid crisis. However, it's difficult to claim that we've reached the peak of the cycle just yet. Last year, the collective market capitalization of listed oil companies saw an average return on average capital employed (ROACE) of 16%. Despite this recovery in returns, there hasn't been a substantial rise in investment capital expenditure (capex), indicating that the upswing in the cycle may have lasting power. Typically, industry cycles endure for extended periods, often spanning 10 to 15 years from their peak to trough, and the returns at the peak are usually higher than what we're currently experiencing.
Industrial Manufacturing PMI-The ISM Manufacturing PMI in the United States fell to 47.8 in February 2024 from 49.1 in the previous month, firmly below market expectations of 49.5 to point to the 16th consecutive period of declines in manufacturing activity, erasing previous hopes of fresh traction in the sector. New orders swung to the contraction territory (49.2 vs 52.5 in January), driving production levels to likewise developments (48.4 vs 50.4) despite a softer decline in backlog of orders (46.3 vs 44.7). In the meantime, prices rose for a second straight month (52.5 vs 52.9), albeit at an eased pace, amid more expensive transportation equipment, chemicals, and computer and electronic products. In turn, the fresh downturn in consumer demand pressed the need for capacity and drove employment levels to decline for a fifth straight month (45.9 vs 47.1).
XLI (Industrials)-So why can’t we see it in the price action?
1. The market is forward looking.
2. Most of the time, the best moves in the market occur when the fundamental data is still in a downtrend or bottoming. Last year the entire market moved higher when the fundamental data was still heading lower.
A sub sector that we like. If our thesis is true this is one of the sectors that should lead the way.
XLF-Financials
According to the MS PB desk, Consumer Cyclicals names experienced the highest net buying activity last week. This theme was previously an area where hedge funds (HFs) frequently added short positions in the latter part of last year. However, most of these short positions have now been closed out, reducing the heightened short risk in this area.
High-end Consumer goods were the most heavily bought theme last week, driven by a combination of long positions and short covers. Despite this net buying activity, hedge funds are still maintaining a net short position on this theme, indicating that the net exposure has yet to fully reflect the recent buying trend.
This is how short squeezes begin. As we talked about last week, they are short everything that is in the reflation trade. Now they are starting to unwind those positions and they have more to go. We have been long the banks, industrials, energy and steel for awhile but Energy is absolutely actionable still.
Copper-This was the final piece of the Reflation trade. This week we finally received confirmation. We closed over our major level. This is an EOD chart which updated at the close on Thursday. Today we will probably see a close around 4.12 today.
Oil CL Seasonality-We are in the strongest seasonal period of the year for oil. Hold here for the next 35 days according to this. How I use this is as a filter. Blue skies ahead.
Oil Seasonality Bars-A strong seasonal period.
Heating oil-The laggard at the moment.
Gasoline-The leader so far.
Oil-Moving nicely but we have a long way to go.
Reuters recently highlighted a significant development: the gap between IEA and OPEC demand forecasts is now the widest it's been in 16 years.
The IEA's prediction from last year suggested that oil demand would reach its peak before 2030.
It's important to recognize that OPEC has a vested interest in a robust global demand for oil, which could potentially lead to an overestimation bias in its projections.
On the other hand, the International Energy Agency has shifted from being solely an information provider to actively promoting the energy transition. Consequently, its forecasts regarding oil demand increasingly align with this advocacy.
This shift has created a noticeable disparity between the IEA's and OPEC's outlooks on the future of oil, which could lead to confusion among analysts and investors. The question of which forecast is more accurate has become a valid concern.
It's worth noting that neither organization is entirely unbiased. OPEC's interest in robust demand may influence its projections, just as the IEA's focus on the energy transition may lead to underestimations of oil demand.
Bitcoin-Understand that you are trading the most volatile asset on earth. Volatility is just normal. Use stops and position yourself accordingly.
Stay informed. Stay resilient. Against all odds.
Warm regards, Jason Perz
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Amazing group you have put together and really interesting conversation! Recent calls on PSX and TECK just flying as well, it's a little spooky.
Hey Jason - great conversation with Kashyap and Steve. I like the format mixing technicals and charts on specific assets with the bigger picture cycles. Macro and Micro. Great insights from all of you, and the callout on NGD Kashyap - what a great chart. It also sounds funny to say, but I am going to pet my dog more when I trade. Calmness. Cheers.