9 Moves to Make as OPEC, 10-Year Treasury Yields Spook Markets
Here we go again.
Financial media headlines have zeroed in on Tuesday’s market pullback, throwing every possible rationalization they can think of at readers.
Source: CNBC
This morning, we started off with the failure of OPEC+ over the long weekend to reach a deal to increase crude oil production.
Curiously, former Secretary of Energy Dan Brouillette said on the network this morning that oil could “very easily” get to $100 per barrel.
Then he also suggested it was “equally possible” that oil prices could tank.
Spoiler alert: Neither of those things are likely to happen.
But oil markets sure pretended like both outcomes were immediately possible in some truly schizophrenic action, rising 2.6% in the overnight before coming down hard on volume at the open here in the U.S.
Source: Bloomberg
If you’ve been a Venture Society reader for a while, then you know we like to go down a checklist to determine whether volatile moves like these have legs.
We can see the price move — a big negative.
And we can see the volume move — a big positive.
Usually, a pickup in volume confirms the price trend, so we need to double-check. And when we do, we can see that we also had a big spike in volume last Thursday… when prices were going up.
Source: Bloomberg
There’s no discernible market reasoning there.
It could be the beginning of an oil price breakdown… OPEC+ countries are notorious cheaters, and without a deal in place they could be incentivized to just produce as much as they want.
But they also need prices up to counteract their individual government’s social spending, which all skyrocketed last year. So, it’s possible this could all be a ruse to jawbone oil prices up in the near term, and then lock in hedges prior to an actual deal announcement later in the year.
Not like they haven’t done that before.
So, the last thing I can do is look at the volatility of oil prices — as measured by the CBOE Oil Volatility ETF — and see if it’s rising.
Source: Bloomberg
Nope.
If it were rising, I’d feel confident calling this a breakdown.
But as it stands, it just looks like a blip.
Generally speaking, movements in oil prices are accompanied by shifts in the interest rate on U.S. 10-year Treasuries, the U.S. Dollar, equity markets and precious metals markets.
And I bet if we look through those markets, we’ll find some solid buying opportunities.
Breaking Down the Dollar
Let’s start with the dollar, as currency markets are the oldest and most liquid in the world.
Tuesday’s selloff in oil and stocks is taking the dollar back up to highs… But notice it is a LOWER high than Friday.
It’s also MUCH lower than the highs we saw back at the end of March.
So, the first thing we want to do… is short the dollar, as expressed by the Invesco DB US Dollar Index Bullish Fund (NYSEArca: UUP).
Next, we want to go long anything that is negatively correlated to the dollar.
This is the same idea I was talking about in last Thursday’s edition of Venture Society, when I said, “if we’re positioning for a USD pullback next week, we want to own the two things that go most in the opposite direction.”
Those were — and continue to be — gold and silver.
Source: Seawolf Research
Of those, only one is down today, and that’s silver… to a HIGHER low.
Source: Bloomberg
This gives us a chance to make our first move, putting in our last quarter tranche in Proshares Ultra Silver (NYSEArca: AGQ).
If gold and silver are first place in that table above, then copper would be a close second.
Well, the red metal is not only making a higher low today, it has also really turned the corner over the past couple of weeks.
Source: Bloomberg
That brings our old friends Freeport McMoRan Inc. (NYSE: FCX), Ivanhoe Mines (OTC: IVPAF) and the United States Copper Fund (NYSEArca: CPER) back into play. And spreading around an eighth tranche in each looks likely to pay out.
The “rip” in the dollar is also exacerbating some outsized moves in Chinese stocks, which moved decidedly lower this morning on news that China’s government is launching a “probe” into domestic companies that list on U.S. exchanges.
Particularly caught in the crosshairs was ride-sharing service Didi Global Inc. (NYSE: DIDI), whose stock is down more than 20% as of this writing.
We’ve been short the iShares China Large-Cap ETF (NYSEArca: FXI) since way back in March, and that position is now up well over 10%.
Given this action, taking profits here appears to be the correct move. We will look to go short again on any significant reversal.
Breaking Down Interest Rates
The move in the dollar appears associated with — if not driven by — a move lower in the interest rate on the 10-year U.S. Treasury bond.
Source: Bloomberg
While it is tempting to look at that chart and say, “that’s a clear three-month trend of moving lower,” it helps to remember where we came from.
Source: Bloomberg
That’s an enormous move, especially considering that interest rates have been trending lower and lower for 40 years.
Source: Bloomberg
So, this is either shaping up to be a complete breakdown of interest rates here, and indicative of a flight to the “safety” of Treasuries…
Or it is just a brief pause in the inflationary cycle that we’ve been writing about for the past year.
Given we’re about to see the highest year-on-year GDP growth and Consumer Price Index (CPI) print most of us will ever see in our lifetimes, I’m going with the latter.
At least until markets tell me otherwise.
If that’s the case, then the short-term negative correlations we’ve seen across equity markets will revert to previous trends — which over the past year, have been broadly positive.
Source: Seawolf Research
And that means we could honestly see a “melt-up” over the coming month… crazy to fathom, I’m sure, but not out of the range of possibilities.
So just for speculation, we’re looking at getting some additional exposure to stocks by deploying a ¼ tranche each in Designer Brands Inc. (NYSE: DBI), Caleres Inc. (NYSE: CAL) and going back to the small cap well via the Direxion Daily Small Cap Bull 3X ETF (NYSEArca: TNA).
Nine plays… in a free letter.
Today is not a day to sit around… If this bull market rally is really done, it’ll let us know soon enough.
Until then, carpe diem, folks…
All the best,
Matt Warder
