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"I like the dreams of the future better than the history of the past." - Thomas Jefferson
Not a day goes by where Oil and Oil related ETFs like the United States Oil Fund, LP (NYSEARCA:USO) aren't referenced in financial media. I can think of no other subject matter which gets as much attention in markets with the exception of Federal Reserve policy. The funny thing about Oil price movement is that it can be used to justify anyone's bullish forecast about the economy and stocks in the future. Oil prices are up? Must be because the economic demand is strengthening and global growth is picking up. Oil prices are down? Well that's more money for the consumer and should result in more spending to come. No matter what, ETF buyers in the popular S&P 500 SPDRs ETF (NYSEARCA:SPY) likely will use Oil's movement to justify their purchases.
There is some truth to both paradoxical statements, but Oil prices largely have little correlation over the long term to stock price movement. Still, it does make for great conversation and allows the imagination to run wild about different scenarios. The reality is that steady Oil price movement is much more important than Oil level, allowing marketplace participants to adjust accordingly. When Oil collapse, it puts credit at risk and increases the potential for default by energy companies. That brings risks of contagion in the bond market. As Oil prices rises, that default risk fades and allows for a potentially large price re-adjustment by equity investors on the value of various energy stocks.
Crude Oil has had its longest streak in history below its 200 day moving average, and that historic move appears close to ending. That does not, of course, mean that prices will hold or push higher. Certainly Oil's downtrend may simply be pausing. However, with bearish sentiment as extreme as it has been, at the same time emerging markets appear to broadly be recovering, the odds favor stabilization at a minimum. Into this quarter, our top quartile ranked ATAC Beta Rotation Fund (Ticker: BROTX, Morningstar ranking out of 1,525 Large Blend Funds for the one-year period ended 3/31/2016 based on total returns) will be overweighted the Energy sector (NYSEARCA:XLE) based on our dynamic momentum weights and risk triggers. While our strategies are purely quantitative in nature, personally given everything I'm seeing that "feels" like the right trade to make.
There is a dilemma here though. Stabilization and even an uptrend in Oil would accelerate the potential for cost-push inflation as expectations for rising prices increase on the market level. Looking at Fed Futures, the market has a hard time believing the Fed will raise rates at all this year, and dovish speak by central banks appears to confirm this. Why does this matter? Because it increases the odds of a reflationary correction at some point this year, whereby the market believes the Fed may actually be late to the game and have to raise rates in a sudden way. The market loves a Fed which is late to the game of raising rates, but hates hike shocks which Oil may be a source of.
Of course, market movement has millions of paths, many of which are unpredictable. The path of least resistance for commodities appears to be higher. Those tracking the Market Vectors Gold Miners ETF (NYSEARCA:GDX), and the SPDR Gold Trust Shares ETF (NYSEARCA:GLD) know just how violent commodity movement can be. A more aggressive move in Oil of similar speed may be much more problematic for the Fed then even the Fed realizes. Volatility, I believe, is far from over in both directions. The frequency of which may become even more historic.
Opinions expressed are those of the author and are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
The Fund's investment objectives, risks, charges, expenses and other information are described in the statutory or summary prospectus, which must be read and considered carefully before investing. You may download the statutory or summary prospectus or obtain a hard copy by calling 855-ATACFUND or visiting atacfund.com. Please read the Prospectuses carefully before you invest.
Morningstar Rankings represent a fund's total-return percentile rank relative to all funds that have the same Morningstar Category. The highest percentile rank is 1 and the lowest is 100. It is based on Morningstar total return, which includes both income and capital gains or losses and is not adjusted for sales charges or redemption fees. Morningstar ranked the BROTX in the top 23% out of 1525 Large Blend funds for the one-year period ending 3/31/16. Past performance is no guarantee of future results.
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Mutual fund investing involves risk. Principal loss is possible. Because the Funds invest primarily in ETFs, they may invest a greater percentage of its assets in the securities of a single issuer and therefore is considered non-diversified. If a Fund invests a greater percentage of its assets in the securities of a single issuer, its value may decline to a greater degree than if the fund held were a more diversified mutual fund. The Funds are expected to have a high portfolio turnover ratio which has the potential to result in the realization by the Fund and distribution to shareholders of a greater amount of capital gains. This means that investors will be likely to have a higher tax liability. Because the Funds invest in Underlying ETFs an investor will indirectly bear the principal risks of the Underlying ETFs, including but not limited to, risks associated with investments in ETFs, large and smaller companies, real estate investment trusts, foreign securities, non-diversification, high yield bonds, fixed income investments, derivatives, leverage, short sales and commodities. The Fund will bear its share of the fees and expenses of the underlying funds. Shareholders will pay higher expenses than would be the case if making direct investments in the underlying funds. All investing involves risks.
Alpha is a measure of performance on a risk-adjusted basis.
Beta measures the sensitivity of rates of return on a fund to general market movements.
As of 4/17/2016, the fund does not hold any of the following securities in its portfolio: USO, SPY, XLE, GLD, and GDX
Fund holdings and sector allocations are subject to change and should not be considered a recommendation to buy or sell any securities.
The ATAC Inflation Rotation Fund is distributed by Quasar Distributors, LLC. No other products mentioned in this piece are distributed by Quasar Distributors, LLC.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.