Since my last post the market has been grinding higher with a couple of modest dips along the way. It's been acting as I'd expected. There is still a tug of war between value and growth with the latter getting the upper hand as of late but there's some burgeoning signs that value has taken back control, the energy sector in particular, which had a notable correction in July and early August. The correction was mainly triggered by fears of the Delta wave and its potential impact on demand. The correction appears to have washed away the weak handed johnny come lately and momo traders. I saw a report from BOA mid August that showed global money mangers had fled the sector in July after having piled in a couple months prior. With natural gas and oil prices remaining firm, the energy sector won't be able to be held back for much longer. The FCF generation relative to market value is already high but it's going to be enormous come Q4 and Q1 2022 because a lot of companies in the O&G sector put on hedges in 2020 which for the most part will be will rolling off in Q3. These hedges have been capping profits this year, especially in the nat gas sector. With nat gas prices well north of $4/mcf these companies are absolute monster cash cows once those 2020 hedges roll off. Even at $3/mcf, most of these companies will produce a gusher of cash flows. This should result in significant dividend hikes and/or share buybacks and also acquisitions.
Nat gas prices have been notoriously volatile and in the doldrums for 15 years, however, because of the anti-fossil fuel movement and ESG push, new investment in oil and gas has been well below average for quite some time and was cut to the bone in 2020 due to COVID. We've been shunning O&G too much. This will have consequences and we could very will have an energy crisis in the next year or 2 because although the future appears to be one of electric vehicles and clean energy, we aren't gong to get there overnight like what the clean energy and ESG hypesters are implying in my opinion. And here's another thought...what if there's a breakthrough in carbon capture technology that either makes it more affordable and/or more effective? That could provide a new lease on life for the O&G sector. Don't get me wrong. I do envision a future where we no longer use fossil fuels and the solar and wind sectors will continue to be growth sectors in the long run, but we can't just turn off the fossil fuel taps as abruptly as Gretta and her ilk want us to.
Getting back to the general market, it continues to be a goldilocks type environment. Everyone seems to be looking over their shoulder for the next big correction but that's tough to get without sentiment becoming excessively bullish. The lack of extreme bullishness continues to be case. Anytime that sentiment starts showing early signs of giddiness it quickly gets washed away on just a modest dip. That's wall of worry behavior which underpins a bull market. We're seeing the market roll over a bit here...let's see how people react it. So far I'm already seeing fear pick up notably. There's a concern out there about market valuations being high which does appear to be the case when you look at traditional measures such p/e ratios and such. I don't want to cherry pick bullish arguments, but Fidelity Sector Strategist Denise Chisholm (who I find is a hidden gem) makes the case that earnings are poised to accelerate more that what's being expected which means the market isn't as overvalued as people think. The concern about valuation is also indicative of the wall of worry. Near a bull market peak you will probably not have such concerns. People will find justifications for high valuation like in the late 90's rather than worry about it as they do now.
Bottom line is continue to look for long set ups and resist the temptation to short. If you must, raise some cash if that's gong to make you a strong holder. People who have used stops loses and made trades based on trend lines, support/resistance lines and such have been chewed to bits.
