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Chameleon Asset Strategies Blog

Items filtered by date: April 2016 - Chameleon Asset Strategies

US equity markets have been married to the price of oil for many months now, yet that correlation appears to have relaxed in the last few weeks. S&P futures have maintained their uptrend and continue to rally significantly higher while Oil has fallen nearly 16% from its recent peak. Did the economics for domestic oil producers magically change? No - sub 40 oil prices should put the default risk for a large portion of the industry right back on the table. Furthermore, this drop in crude has occurred alongside a very sharp decline in the US dollar, which typically provides buoyancy for commodity prices. We’ve seen build after build in inventory and coordinated production cuts hinge on Iran voluntarily dialing back. I’m expecting a bounce here ($35-$36), but aside from declining rig counts, the fundamentals are eroding again.

While Equities march up, one would expect US treasuries to fall, however that too is not the case. As anticipated, the 10 Yr yield is compressing again as prices slice through key resistance levels. Given the ridiculously low yields for other comparable government issued debt around the world, I think that our treasuries are reasonably priced and can continue to move quite a bit higher in the absence of Fed tightening.

Add all of this up and we have market forces that are grossly out of balance. Treasuries and Oil are behaving as I’d expect them to given the data flow. In my opinion, the odd man out here is US stocks. I think that S&P futures have priced in an “all clear” for energy producers which hasn’t happened and may not. None of the major indexes have made a new high, and all still have a chart consistent with continuation of a bear market. All are once again sitting in attractive sell zones. We haven’t had a meaningful move to the downside in over a month… My money is on calm before the storm, not happily ever after.

All the best,

Stephen

 

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