Energy Had “Face-Ripping” Week, S&P Closes Just Under ATH
The S&P 500 closed at 4,229.89, which is just shy of the 52-week high of 4,238.04 and is about 25 points higher than the 4,204 level that we closed at last Friday before the three-day weekend. It was its best day since May 24th. What a three-day weekend it was. There is less and less maneuvering room for those who would make you think we’re stuck in a pandemic-oriented, stay-at-home reality. The beaches were full from sea to shining to sea and across the territories. Pent-up demand that has long been suppressed by a reality dominated by COVID-19 is starting to meet goods and services long foregone. Summer has begun in more ways than one. We’re all familiar with the ways downside moves and panics can exasperate and sharpen downside moves. At FSInsight, we suspect we’re about to get acquainted with the other side of that coin on the upside as this unique moment in history converges with an extraordinarily strong, and increasingly creditworthy, US consumer. Remember folks, 70% of the powerhouse US economy is dependent on the strength and financial health of the US consumer. This bodes well for the coming quarters.
Our Head of Washington Policy Strategy, Tom Block, also pointed out on our research call this morning, having been a party to many C-suite discussions on earnings releases, that there are many companies who probably chose to take a hit this quarter for a number of reasons. That makes a great earnings season seem even better.
We know it was a hard week in the market for many folks. We’re not seeing a lot of our institutional clients believe in the Energy trade. We’re having people say it’s dumb money and they are just waiting for Technology’s Great Return. Well, you might be alright on longer time horizons. However, if you’re thinking that will happen now or in the next six to twelve months, we think you’ll be waiting in vain. We’re seeing strong indicators across the board that the upside and capacity for surprise is in Energy, Materials and Financials! Millennials are often talking about being in the here and now. Ok, so buy companies like EOG Resources, the subject of the week’s Signal From Noise which is called EOG: The Death of a Shalesman.These guys are paying forward their gains today directly to you. You’re benefitting from what’s going on today, not valuations that are so high they are almost inherently speculative about what will happen in a decade or more.
The Nasdaq is coming back and enjoyed a three-week winning streak. Beware of the slope of hope though friends. On a gut level, and for reasons we’ve elaborated on in previous notes we think you should be wary of Tech. While recent strength is good news for the averages, relatively we still see the better risk-adjusted return in Epicenter and cyclical names. However, the tide that is coming could very well lift all boats, and it is not as if describing any of the major FAANG’s as weak would be accurate. Indeed they appear to be tripping over their own strength and have earned the ire of both sides of the aisle among their other list of potential short-term headaches.
Those who thought the numbers were coming in hot and the Fed would soon have an egg on its face were disappointed by this morning’s goldilocks job number, as many are calling it. The reason this is being called ‘goldilocks’ is because the number is high enough to indicate economic strength, but low enough not to undermine the narrative that is behind the Fed’s ultra-accommodative monetary posture. Jay Powell got off easy this week, but he will have plenty of time to continue earning his already considerable meddle on uncertain and winding road of fortune that is seeming more and more littered with risks hazardous to his legacy as a shepherd of Economic stability.
The meme-stock returned with the same fervor of late-January, but this time concentrated in AMC. Coincidentally, this name was recently added to our Obliterated Epicenter stock list despite the obvious detachment from fundamentals. A famous old saying goes the market can stay irrational longer than you can stay solvent. This is why we like to listen to the signals we get from the market and not lecture others, and most certainly not Dr. Market (as we call him out of extra reverence). This is why we’ve stuck with Energy and we are called silly. It has been leading all year and we’re nearly halfway through. You heard it here first. If you’re an institution who has no Energy, you’re going to have a very hard time not looking bad. This trend is not ending in Energy, the outperformance is just beginning in our estimation.
As you can see, one our favorite ways to get exposure to Energy has been through OIH which, based on historic correlation to the price of oil, has a much higher implied price than the current one. We think there is plenty of upside for everyone left in this name. We focused its primary component SLB in a column some months ago as well.
Be sure to check out my colleague Tom Lee’s note from June 2nd where he elaborates on an important insight for anyone investing in Energy and that those on our crypto side will already be familiar with. Do not miss out on gains – HODL!
