Small-caps breakout underway and Oil is +1% above 2019 levels, but XLE/OIH is -21%/ -33% lower...hmmm
STRATEGY: Food for thought on small-caps and Energy
We have been expecting that small-caps and Epicenter stocks would get “rejuvenated” once US COVID-19 cases started to roll over. And this week, we believe we got the “leg down” in USA COVID-19 cases. And as the chart below shows, if cases are rolling over, then the “epicenter” trade is back.
STRATEGY: Buy small-caps (proxy is IWM), Epicenter (SPHB, etc) and Energy
And to reiterate, we believe the Epicenter trade is coming back on strong. The trade consolidated for the past few weeks and it was a rocky period. But today, it looks like the Russell 2000 is on its way to breaking out.
– the key level on IWM is $226.69 (the most recent high), but once that is cleared, we think IWM can make all-time highs
– Small-cap index Russell 2000 is a good epicenter proxy because it is chocked full of cyclicals.
The other sector that we think will soon be a major beneficiary, if US COVID-19 cases are legging down, is Energy. Energy is arguably the most sensitive to an economic re-opening because the movement of goods involves consuming some form of Energy.
– Oil is now +1% compared to where it was on 12/31/2019
– Energy sector (XLE) is still -21% lower and Oilfield Services (OIH) is -33% lower
How can the Energy equities retracement be lower than the commodity price? This makes little sense to me. This is why we see a big catch-up trade in XLE and OIH coming. One where XLE could rise >45% or more and OIH >100%
The future is uncertain. This is food for thought.