ATAC Week In Review: Fear Lower Oil


“Never be afraid to sit a while and think.” – Lorraine Hansberry

Large-cap stocks held on to moderate gains as the average stock was flat to down in a week that on the surface looked uneventful, but from a sector standpoint had important movements take place. The Utilities sector, perhaps the most predictive sector of the stock market, broke down meaningfully relative to the broader stock market starting Wednesday. At first glance, one might think after reading the 2014 Dow Award paper on Utilities that this is inherently bullish for stocks given that when the Utilities sector underperforms, historically going back to 1926 stock market volatility drops and equities rally.

And while this is true, the issue is the speed of underperformance. The faster Utilities underperform, the more likely on a short-term rolling basis in the coming weeks they are to outperform as that lower relative level dictates the soon to come change in rate of change. This means that while Utilities breaking down is bullish, the speed may actually be a set up for another pulse of risk-off strength, potentially at the tail end of November for another trigger to get defensive through either an all-in rotation to defensive sectors away from cyclicals (as our equity beta rotation strategy does), or an all-in rotation out of equities into Treasuries (as our inflation rotation strategy does).

We are only a few short weeks after the end of Quantitative Easing, and Wall Street seems to be under the impression the year is over, forgetting that the last time QE1 and QE2 ended, stocks corrected severely a month later.  That would imply December may actually be a high risk month. Ten-year Treasuries, which have held in a tight range just above 2.3% are still signaling concern about US growth and inflation, as yields still seem to ignore what tends to be negative seasonality for Treasuries that begins in November. Combined with Junk debt taking another relative hit, the precursors to a meaningful breakdown seem to be taking place potentially as credit spreads widen and fail to confirm overall bullish sentiment into year-end.

Reviews

  • Total Score 0%
User rating: 0.00% ( 0
votes )



Leave a Reply

Your email address will not be published. Required fields are marked *