Market review 22.06.26
Countertrend moves, Druckenmiller
I shared this chart on twitter recently:
And it got featured on The Chart Report, a free daily recap done by Patrick D. of some notable charts shared on FinTwit. Be sure to check it out if you haven’t already.
Patrick captioned the chart like this:
Commodities have been dominating Stocks and Bonds since the end of 2021, however, they’ve come under pressure recently, while Stocks and Bonds have stopped going down. The Commodities ETF, $DBC, has corrected 10% from its peak in the past nine days, putting it on track for its first down month this year. This is a meaningful change of character for what has been the leading asset class this year. As Commodities lose momentum, the question is – Will we see a rotation back into Stocks and Bonds? Or, will all three continue lower?
That’s the question. So far this week, as commodities dropped, stocks & bonds rallied. And the charts show evidence that this dynamic can continue for a bit.
All year, KRE:SPY has been weak while the 10-year treasury yield ripped higher (along with inflation). This negative divergence can lead to weakness in yields.
Next, DBC made a failed breakout this week.
Meanwhile, XLV is showing a failed breakdown. Health care is now the sector closest to its 52-week highs. Many big pharma names are up >20% in the past year (eg. LLY, PFE, ABBV, MRK, BMY, UNH). I touched on the many setups in this space back in August (link).
They say “from failed moves comes fast moves in the opposite direction.” Perhaps commodities see further pain, while stocks see more gain in the short-term. Sentiment certainly had been lopsided for months.
Since May, some of the best performing sectors have been: China tech, biotech, and solar. Here’s ENPH weekly showing a 20-month base after a 200X run. Also checkout PDD, JKS, DQ, ARGX, and UTHR to list a few.
BTC Weekly. Bitcoin has been highly tied with broad stocks. It hit multi-year support after a waterfall decline last weekend.
And BTC:XOP also hit major support. This ratio is essentially the worst vs. best asset over the past 6 months. It drives home the fact that a counter-trend move in stocks vs. commodities can last a bit longer.
The bigger picture is still bullish for commodities, and bearish for stocks & bonds.
Last week, we looked at how RBOB futures monthly is still above a 15-year base. And commercial hedger net positioning in RBOB is near decade+ highs, while it’s near 6-year highs in crude oil. This is not what you see at major tops.
I mentioned last week that commercial hedger positioning in gold & silver was getting interesting. It’s even more so in palladium:
High-growth stocks are still in strong downtrends. It’s rare for a weak sector to make a V-shape recovery from a massive drawdown and become a market leader.
Finally, bond yields have come out of decade+ breakouts.
I’ve only mentioned Stan Druckenmiller once on this blog. And it was back in Feb ’21 when Stan said he was bullish on commodities and bearish bonds. It’s safe to say that he made an excellent call.
Well, Stan did another interview 2 weeks ago to provide his updated thoughts. Here’s what he had to say:
While he got the inflation call right, he was surprised by:
The magnitude of inflation
The magnitude of the decline in high-growth stocks
How slow the Fed was to respond
Stan made some money being long oil and short stocks & bonds but currently has no big positions either way. His current thoughts:
Short-term, oil is a crowded trade. But longer-term, oil can work for the next 5 years thanks to supply shortages.
While stocks can see a meaningful rally from here, the bear market is not over. It’s possible that we could be in a bear market that lasts many years.
Bitcoin is a risk-on asset while gold is a risk-off asset. This is something I’ve been writing about for over a year (link).
General trading advice:
Position sizing is 70-80% of the game. We all go on streaks: when you’re hot, increase position size. When cold, don’t trade big.
Extremely important to take a break from trading when you’re having a bad streak. Rebuild your confidence.
If you’re not passionate about markets, go do other stuff.
With age, says his analysis has gotten better but returns have dropped because he’s trading less aggressively. Says he doesn’t have the nerves that he did before.
For another (more complete) summary, checkout this twitter thread.
It’s all about timeframes.
Since Dec, commodities have rallied while stocks & bonds fell. But this week, we saw counter-trend moves. There’s reason to believe this continues in the short-term. However, don’t count on the inflation trade being over, or growth stocks taking over lasting leadership.
That’s all for this week! If you found this post useful, please give it a like and share. Thanks for reading.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.