Navigating the minefield ahead
FED, CPI and more: What lies in store for different sectors?
On the eve of the March FOMC, we wrote that a neutral Fed would set off a relief rally that could last 4-6 weeks at-least until CPI data comes out on April 10th. This turned out to be correct and we have had a rally that brought the indexes out of correction territory. In addition to our macro calls, we have also had a string of trade ideas that worked out very well.
We are certainly not oversold any more and seeing the moves in meme stocks it is easy to say that euphoria is back along with unhinged optimism against the backdrop of real issues that are being pushed to the background. Did we just end the war, resolve the supply chain issues, remove the last vestiges of Corona Virus and defeat inflation? If we did, we at Monetive are not privy to that memo.
We believe that the structural problems that derailed this market are still around and this is a bear market rally that is likely to peter out in a few weeks. We are also keenly aware that any actual positive development on any of these fronts could set us up for a nice rally. This is why we are staying selectively invested. We are taking profits where we can and trading with tight stops. We are also adding hedges which are a whole lot cheaper with the current market melt up. This is indeed a difficult market for Investors.
Lets take a look at Industry strength from early march to now for Russell 3000, the broad market index. Top Grid is on March 5th and bottom on April 2nd
In early March Risk-Off was still the rule dominant strategy. Safety sectors showed strength. War was playing a role in running up Energy, Material and supporting Industries. As we get to end of March, Energy still rules the roost and safety sectors are still strong. Increase in interest rates is getting some allocation into Banks but the yield curve inversion is limiting what should be a big jump in financials as a whole. Moving to a sectors view, here is what the picture looks like:
YTD, only sectors that are in the green are Energy, Utilities. As we get closer in time, we see the impact of rates on Financials over last month. The recent yield curve inversion has again sold off the financials. While the picture stays muddled, the strength of safety sectors and energy is unmistakable. At Monetive we are staying invested in these sectors but we are hesitant to add substantially to our positions. We are very focused on picking the best of breed in each sector showing both fundamental and technical strength along with institutional inflows.
We are still bullish on Energy but we dont see any bargains out there. We find plenty of trade opportunities when Oil gets below 100, mostly in the midsize drillers. We are continuing to hold Oil Majors while adding to our hedge with a commodity short position.
We are long term investors in miners of Industrial Metals and Materials. Russia is a significant supplier of many industrial metals and we do not see any quick resolution to sanctions. Even when eventually sanctions are removed, we expect consumers to diversify away from Russia as a primary source. This will provide a longer term support to Nickel, Palladium, Platinum, Manganese, Aluminum, Titanium, Lead, Tin, Coal, Iron Ore, Diamonds all of which Russia is a significant supplier. In addition, EV’s are driving a massive demand cycle for Copper and this we expect to be a multi year bull market.
Agricultural sectors and its suppliers are all in a good place though overextended. We will be looking to add on any significant pullbacks especially in Fertilizer & Machinery.
We have trading positions in growth and we will be lightening up into the CPI release. We are particularly concerned about forward guidance, We will add where companies beat and raise guidance.
We continue to like Cyber security & 5G & Data Center Semis for long term and will add on pullbacks.
Healthcare: This sector looks overbought and we expect some pullback and reallocation into biotech. Biotechnology, a contrarian pick we started nibbling in February and called a bottom last week. In the meantime we have positions in LABU as a starter exposure into the sector. We are negative on this trade and most likely early. We would advise caution. A separate post on this is still work-in-progress. We are working on a set of long-short trades that we are very excited about.
Financials are in no man’s land right now. Increase in short term rates cancelled out by long end of the yield curve inverting. We are just a bit more than a week away from bank earnings and we will be looking at the commentary from Jamie Dimon to get clues on the sector and the larger economy. JPM earnings call should be on everyone’s calendar as a much watch event even if that is the only call you listen to in its entirety.
Industrials especially in the Defense & Aerospace should get a boost when the US Defense budget is signed off. We are following this closely. In the near-term any talk of pullback from Russia is likely to further sell off this sector. We urge some profit taking on short term positions and a hedge on longer holds.
Defensives (Staples, Utilities) are very overbought . This is mostly a risk-off trade in our opinion. We do not see much more upside here.
Since Q4, Archna and I have been discussing launching premium services and have been working behind the scenes to design a set of offerings. As most companies have started cutting back on work from home, we have been fielding a ton requests from folks about managed portfolios. While we are not ready to launch our own fund we hink it is time to launch a model portfolio service in a Follow-Me Model. We will be creating a real account with our capital and initiating trades based on our approaches and analysis and we will be exposing these trades to subscribers to mirror our trades. We will notify subscribers of all trades, adjustments, hedges and exits.
We will continue to publish our newsletter here while we launch additional services in the coming months. Stay tuned here for updates.
As always, I want to end with this disclaimer, that our trade ideas are not solicitations or recommendations. You should always do your due diligence before your invest and consult with your financial advisor / RIA.