The recent action in the S&P is heady enough to make your head spin like linda blair in the exorcist. So much so that I try to focus less on trading in and out of tight quarters in multiple stocks and focus on the bigger market indices moves.
-THE GREAT OIL TRADE-
The WTI oil trade has been a HUGE winner for the portfolio. Since buying short etf SCO in November, I'm up over 70% in just about a month. I've continued to trim the position as we've spiraled downward not because I think a solid bottom in oil is approaching, but because I'm a firm believer in taking profit as a trade becomes a bigger and bigger winner. Nothing goes straight up and down, and oil, like other trades, will eventually bottom. History in this commodity tells us that when it does, the snap reverse move will be sharp and severe.
That said, I halved my position again today, and have a qtr position left in the name across multiple accounts. I was hoping for a move to the 65 level, but we only got to about 60 before the bounce collapsed back to 55. This tells me that we likely have further down to go in the price of oil. How far is anyone's guess, but 55 (as I noted in comments across other articles) was a brief level of support the past few days, but the bounce I was looking for did not hold.
-IT'S THE ONES CLOSEST TO YOU THAT HURT THE MOST-
I recently closed out my LNCO position after some very detailed analysis on the bonds of this name and other like names in the high yield paying oil sector. The research and thesis done by other SA contributors was paramount in helping me make the decision to close the position after a 30% bounce the past few days from the recent dive to 9/share. I was initially going to hold long term, even bought a nicely sized lot of shares at 9.30. But just because oil could bottom soon doesn't mean the sector will be in the clear. Oil supply and demand is still an issue. Production globally is still an issue. OPEC is still an issue. The price of oil could very likely be below breakeven points for many MLPs and jr oil producers and I'm just not willing to take the risk on LNCO any longer.
-THE WORLD IS A STAGE-
There's been A LOT of speculation (as usual) about the next big move in the S&P and global market. My sense is that the market (while fairly valued) will likely not see a MAJOR correction over 10% until we're significantly overvalued. The market tends to wait until it's running too hot to cool down. Yes, in the past the market has looked to be fairly valued, only to rise higher. But, that was when we had easy money from the fed flowing into the market. The fed turned off the tap, and while they aren't raising interest rates, how else will companies justify a significant move higher in their stocks and the overall market? Buy backs you say? Perhaps, but most would need to start borrowing money in order to keep up the pace of buying back shares in bulk. Dividends! Same issue here. The earnings of most companies are littered with soft balance sheets. Profit masked with cost cutting, excuses and the like. What happens when the minimum wage is increased? What happens when the stronger dollar is finally reflected in their earnings next qtr, what happens when they can no longer float the reason for soft earnings is because Europe is weak? What happens when their China sales continue to soften because China is slowing?
I may sound doomsdayish here, but the above is all a realty. Yes, many have been saying the above for years, but never have the technicals and data been more true. The perfect storm seems to be brewing, and while I don't think it means the end of the bull market, I think the natural order of things is a rebalance. It's finally happened in oil, after the commodity ran way off the reservation with $100+ oil prices, even though supply had run rampantly high. When will it happen to the broader market?
Some things that can save us all - Europe gets its act together, enacts solid liquidity and bond buying measures to kick start the economy. Russia tempers its posturing in the Ukraine. Emerging markets benefit from a stronger Europe and continued low interest rates in the US. Together lending and investments increase domestically and abroad.
-IS 2015 DOOMED?-
My stance to date has been that the S&P and broader markets have been living it up on borrowed time. The US has continued to be the best house on the block, but that doesn't mean it's not crowded and it can continue to hold more and more people. At some point soon, people will have to stop holding their breath to let in more investors and there will be an EXHALE moment. A VERY BIG EXHALE moment.The problem with predicting when this will happen is that everytime we think it's arrived, the market marches higher. So, I won't short the S&P, just not worth the trouble. But, I will be much more nimble about trading in and out of more obvious plays (like the demise in WTI oil), but I will go in big and not overstay my welcome.
This way, I hold a large cash position at all times, just in case d-day does come sooner than later.
I'm terrible at predictions - my most successful one is the most recent demise in energy, but who would have thought OPEC would be so stubborn. That said, I think a perfect storm is brewing in Q1 of next year that will either provide another major pullback (like the one from October), or possibly a correction (depending on the geo political headlines at the time).
A few reasons why - I have little to no faith that Europe will take a strong and impactful move to stem the recession they are currently in. The continent has done little to nothing to turn things around in a commanding fashion the past 6 years. Unlike the US, they will wait until the situation is more dire before acting. There's just too much history for them to overcome (both between cultures and economic styles and beliefs - completely different than the Western philosophy). The lack of a credible easing initiative by the ECB will be in part the reason for the market's fall in Q1.
Don't worry about interest rates, because the US will not raise the during this administration; especially since we're just limping along on the growth path. Washington knows we'll continue to just limp along unless Europe recovers. The US can simply not carry the burden of the world economy on its massively indebted shoulders.
Does Greece matter at all? Greece is a fairly small portion of the EU GDP, so while on paper any stress they cause for the EU shouldn't hamper EU's effort to recover, the headline risk could be the powderkeg that sets fire to a possible storm of selling across global markets.
How important is Russia? Many seem to think Russia will flex its military muscle more now that it's backed into a corner via economic sanctions imposed and lower oil prices. While no one can predict what a country will or will not do, it's hard to imagine Russia will do anything more than continue a firm posturing on the world stage. The culture is what's driving the downward move into recession, but any massive military action would be met with harsh reciprocation by the US and allies. Many think this is a farce because the world has learned from it's massive war in the middle east and resorted to sanctions to impose foreign policy will. But, economic sanctions are working against some of the less cooperative countries and should not be confused with no willingness to act military if needed. We simply haven't come to that point yet.
That said, an unstable Russia north of our European brethren is not a recipe for economic growth. This could be another powderkeg, more powerful than Greece, given the right timing.
My sense is that the S&P is barely holding onto its gains this year because of the fear of missing the santa claus rally and potential rally in European equities in January when the ECB meeting again.
Until then, it's hard to see the S&P or overall markets moving much to the upside or downside in a major way. If we do make a major move, down would be my call, but how much is the big money question.
The next major move could happen after the ECB meeting, or during the Q1 earnings reports. But, I do think Q1 will be a decisive time for the market.
I'll end the article by saying...this is ALL IMHO, I'm not a prognosticator and don't pretend to be one on TV. Do your own homework, build your own investment thesis and strategies, make the moves that are comfortable to you and let you sleep at night. No reason to follow anyone blindly into the dark.
Disclosure: The author is long SCO.