Mixed feelings

Well, the markets have staged quite a strong rally so far since my last post and is knocking on the door of all time highs once again. The S&P is actually already there. This week we have FANG earnings on deck and it's happening at a time where the market is ST overbought. It's an interesting junction because although we are ST overbought I get the sense that there are trapped bears out there who shorted the bounce in the market mid October. Why? Because I myself was tempted to make a ST bearish bet and so if I was tempted I'm thinking many of the bearishly inclined must have pulled the trigger and are now underwater. Being short the market as it's making new all time highs is usually not a good spot to be in because fresh all time highs tend to result in more all time highs. It would appear to me that barring some significant negative bad news,  pullbacks should be relatively shallow.  

Energy stocks sold off earlier in the month but are rebounding today as oil and nat gas are rallying today. The more I think about the energy complex, the more I'm becoming a weak holder. I mentioned in my last post how the cat is now out of the bag with respect to the energy crisis. This awareness has resulted in a major shift towards energy stocks from so called "institutional money" as indicated from BOAs  most recent Global Fund Manager survey. It's the exact opposite of what they did in August when energy stocks had been selling off and making a low. Financial are also being chased.  Rising energy prices are not necessarily bearish for the market in general until they get to the point where they have risen "too much" . Where is that point? I've read that it could be around $140 oil. 

In addition to the exuberance in the energy complex there's evidence of extreme pessimism in bond which goes hand in hand. All of this suggests we are close to the peak inflation narrative. If that's the case and we see energy prices and bond yields cool off, that could provide fuel for the markets to power higher barring that the decline in inflation pressures are not the result of collapsing economic growth. I'm seeing hockey stick charts when it comes to inflation related pressures and rates of change in commodity prices. Some might say that this constitutes a long term break out, but it could easy well be largley the result of the supply chain disruptions were a seeing which not only results in lower supply but also hoarding. I've been reading stories about how the warehouses for major commodities like copper, zinc and nickle are a very low levels.

This whole supply chain disruption is making me rethink my thesis about the commodities complex in the short to medium term. Once we start to normalize we could see at least a 6-12 month period of disinflation which would hurt the entire commodities space, especially energy. Although there has been a lack of new investment in energy cap ex, there is more ability for a supply response compared to that of  metals. In addition, high energy prices may speed up the transition to electric vehicles and so you could have negative demand pressures on energy forthcoming. With metals on the other hand, the demand side is slated to have positive demand pressure long term for the same reasons - electrification.  So, if 2022 ends up being the year of disinflation which hurts commodities in general, I could be a strong holder of my copper/mining plays but not my energy plays which I have already reduced by 50% and am looking to sell more into strength. 

I am also looking to initiate a position in LT calls on TLT given the contrarian condition of bonds. It will also nicely offset my positions in commodity related stocks. I also have a healthy level of cash. You always need to put yourself in a position where you could be strong holder. This is what I'm doing.