Energy Went From Bear Signal to Even Bigger Bear Signal

I had been looking for weakness in energy and maybe it will still arrive, the head-and-shoulders pattern isn't a total bust yet in XLE. A bullish interpretation isn't good news for markets either though, since XOP and FCG are ready to explode higher if the trend continues higher. If energy climbs, it will hammer bond prices. Not only will the Fed be tapering by November, but the "Fed has lost control" meme will start spreading. Which means they might have to shock the market with an accelerated taper timeline or if they want to try jawboning along, start talking up faster rate hikes. The "Goldilocks" scenario would see energy and interest rates moderate, with no signficant upside or downside. In sum, I'd still rather be shorting Nasdaq here because I think tech is in a lose-lose scenario outside of the Goldilocks zone.

I'm a little surprised that solar hasn't followed energy higher, but perhaps the failure of wind is casting a pall over the entire alternative energy sector. While I have been critical of the "Green" policy of replacing existing energy supply with less reliabe alternative energy, the real culprit from my persepctive has been wind. Imagine Perhaps solar will irrationally dumped in a broad anti-Green reaction. Something to file away...

Commodity Ratio Charts

Forget the Election, Near Future May Come Down to Stimulus

Most traders are focused on the election and potential volatility around it, but there could be massive volatility in the next year. A secular shift into value/commodities could be underway or a shock downturn in the markets if credit don't improve or government deficits don't offset the lack of private borrowing.

A few of the funds, stocks, and currnecies that could be impacted by the election are below. Long-term, the election will be a footnote for most assets. The U.S. dollar is headed in the same direction either way. USG's fiscal deficit is headed in the same direction. However, the risk of another dollar "bull" rally is higher with Trump because of his trade and economic policies. If Republicans hold the Senate, Biden's spending plans will be limited. If Democrats take the Congress, they will eliminate the filibuster, lowering the risk of defection on spending and other bills. That's the most bearish scenario for the dollar.

The dollar looks bearish. As covered in recent posts, it broke its very long-term trendline. The past two breaks met sustained selling for 18 to 24 months. A rebound to 96 would invalidate the analog. A rebound would not invalidate a bear market, but as long as it could sustain a rally, the terminus of such a move could have a wide range of possibilities. A break of 88 on the downside would be the point at which I'd through caution to the wind when it comes to weak dollar trades. For short-term trades, the most volaitle outcome would probably be Trump win expressin in KRW and CNY.

Solar, marijuana and guns are all at interesting junctures because while they have rallied strongly (perhaps the Biden bet), they could be in techncial breakdowns if a Trump win reversed even a little of the recent gains. I added a new marijuana ETF, symbol MSOS, that covers the U.S. market. That is the best bet for those bullish on cannabis legalization at the state or federal level. Also added natural gas and fracking ETFs. There are much bigger issues at play with these sectors including high debt levels, but natural gas looks like it might have bottomed. Perhaps a Trump win would be the spark that ignites the sector.

Commodities and infrastructure also look bullish here. I'm using a bunch of ag ETFs inatead of futures because they are confirming or look set to confirm bullish developments on the futures charts. Copper and copper miners have both taken bullish turns. I threw in Nigeria because I think it is the best example of a resource-exporting frontier market. It looks similar to some of those ag charts.

Cryptocurrencies are showing bullish patters. Bitcoin needs to crack $13,800, call it $14,000, to hit that red box at $17,000 by year end.

I remain long-term bullish in gold miners. I have sold my TLT puts and bought some SIL puts to hedge. Long commodities, crypto, value and inflation looks much more attractive than long technology and major indexes. The Dow, S&P 500 and Nasadaq peaked in September. Only the Russell 2000 has moved higher and it still has bearish potential. The seeds for a post-election correction led by technology are there, particularly with a Trump win. Longer-term, the weight of evidence is moving in favor of a secular shift in markets and inflation.

That said, take a look at Nigeria around 2016, a similar pattern followed by a breakout that failed at the calendar turned to 2018. Every central bank intervention before has produced brief spikes in commodities, emerging markets and inflation expectations. Every spike was followed by new lows as structural deflation in the eurodollar market reemerged. Putting it together, commodities and value look good in the next 6 to 18 months with risk of a post-election correction. Reassess moving forward based on major fundamentals such as DXY, copper price, etc.

Far more important than the election is the real economy. Total Loans and Leases at commercial banks (TOTLL) have reversed most of their covid gains. Year on year growth is back to 2018 levels, consistent with the stagnating post-2008 economy. Government stimlus must remain high if private borrowing doesn't pick up. If borrowing doesn't pick up or stimulus doesn't offset weak private borrowing, all these bullish charts are going to sour fast in 2021.

The 30-year mortgage keeps falling despite a rebound in long-term government bond yields. This should bottom and turn higher if there's a general bullish resolution after the election or major stimulus.

The clearest asset to me remains gold and maybe Bitcion because the central bank and government will act if the economy sinks. Gold can climb even if monetary intervention fails. At some point in that scenario, gold and even gold mining shares will stop falling with other assets because investors will realize the government's interventions are failing. They will start pricing in more and larger interventions into the gold price. This will be expressed in the gold/copper ratio making a bullish breakout. Right now it looks like it wants to trend back into the pattern...

Speaking of Commodities: FCG Breakout

LNG Future is Now: Chinese Prices Rise Faster Than Bitcoin

Chinese prices were around 4000 yuan /ton a month ago, now they have blasted through 12,000 yuan /ton. Prices exceed the 2011 highs.

iFeng: 液化天然气暴涨一月破万！快过比特币

The reason for this rising wave of LNG, dean of the Graduate School of Tsinghua University, former Head of the Department of Thermal Engineering, Yangtze River scholar Professor Yao Qiang said, while rising demand for natural gas, natural gas supply, but there are some problems. First, the planned overseas resources have been "ball dropped." Originally scheduled for 2017 put into operation in Tianjin Petrochemical LNG receiving terminal can not be put into operation as planned, reducing the supply capacity 2000-30000000 m3; Central Asian gas compared to the planned supply contracts declined by 4000 to 50,000,000 m3 / day, the new Shaanxi-Beijing put into operation four-wire can not play a role, leading to supply shortages, and are concentrated in the northern region.

Meanwhile, with the continual progress of "coal to gas," there is some support and boost the role of LNG prices.

FT: China shakes the world

China’s strategy of shifting away from coal and towards gas is also having a significant impact on LNG markets, driving spot prices in Asia up to almost double their lows earlier in the year. Reuters reported that LNG was being re-exported to China from Japan, and tankers were being diverted from as far away as Brazil. In a sign of China’s desperation for gas, the state-controlled oil company Cnooc hired 100 lorries to transport LNG 1,400 miles from the south of the country to the north. Cnooc’s Tianjin LNG import terminal near Beijing is already working flat-out.

Bloomberg: The Whole World Is Paying the Price for Cleaner Air in China

Policies promoting natural gas use have helped boost China’s consumption by 19 percent this year and raised it to the world’s second-biggest importer of liquefied shipments of the fuel, lifting prices for spot cargoes. Higher gas prices are boosting demand for coal, which has already seen prices rise because of separate Chinese policies restricting mine production, Goldman analysts including Christian Lelong said in a Dec. 12 research note.

Earlier this year:

Bloomberg: Liquefied Natural Gas Is All the Rage in the Trump Administration
FT: The Financial Times Reports on President Trump’s LNG Export Push

Donald Trump is engineering a sharp shift in US energy policy by using natural gas exports as an instrument of trade policy, championing sales to China and other parts of Asia in an effort to create jobs and reduce US trade deficits. In an attempt to unleash US energy resources, Mr. Trump is trying to promote more liquefied natural gas exports and not just use LNG as a geopolitical weapon aimed at nations such as Russia, as was the stance of his predecessor Barack Obama.

Desmog: Trump Admin Quietly Pushing 'Small Scale' LNG Exports That Avoid Environmental Reviews

Although it is a better strategy to keep supplies at home and sell value-added products using cheap natural gas, the gap between U.S. and Asian prices is too large for the market to ignore. The LNG will flow.

2017 Picks: A Mixed Bag

At the end of 2016 I made a few predictions for 2017.

I thought Turkey and Mexico (TUR and EWW) would decline. I missed the broader emerging market trend and the extent to which the U.S. dollar would correct, although in Turkey's case, the rally is almost entirely driven by equities, not currency.

I thought FCG was a good speculation at the end of 2016 considering it was very cheap relative to the energy sector. I thought it would at least perform no worse than energy, but it underperformed again. Still, it did not hit a new relative low versus SPDR Energy (XLE). FCG's relative low was achieved in early 2016. I still like it as a relative bet on energy for anyone who is bullish on energy. I make no call on the overall energy sector; I currently own November puts on SPDR Energy Exploration & Production (XOP).

I was right on the solar (TAN) call. And the Chinese yuan.

In the near term, the Chinese yuan looks a little oversold. I expect a bit of a rally after it cracks 7, even better if it rallies before since it will catch the bears. A 3 percent rally takes USDCNY to about 6.75, a 5 percent rally to 6.60. The PBoC has given bears nice entry points before, hopefully they provide another one. I don't think USDCNY will be the best currency play.

It ran all the way to USDCNY 6.48 on September 8. On September 10, I wrote: Time to Short the Yuan? USDCNY hit 6.62 today.

2017 Picks

I think I had only one pick for 2016 now that I go back over my posts: Turkey down.

2016 Forecast: Turkey Collapses

TUR was $36.07 in that post and closed at $32.07 today, not exactly what I expected. I'm sticking with this pick for 2017 though. Turkey had a lot of geopolitical problems in 2016 and I expect they will turn into financial troubles in 2017. The chart alone points to it. A different take on Turkish politics from FPRI: What the Assassination of the Russian Ambassador May Be Telling Us about Erdoğan’s Turkey

Another country with a similar chart is Mexico. (EWW) I'm not sure if this is a "Trump" formation caused by investors anticipating bad news for Mexico or not. But I will look for a downturn in 2017.

In the near term, the Chinese yuan looks a little oversold. I expect a bit of a rally after it cracks 7, even better if it rallies before since it will catch the bears. A 3 percent rally takes USDCNY to about 6.75, a 5 percent rally to 6.60. The PBoC has given bears nice entry points before, hopefully they provide another one. I don't think USDCNY will be the best currency play.

Speculative long picks: natural gas (FCG) and solar (TAN). I will pick out some higher volatility components within those funds.