Over the last week, the S&P 500 is up by about 1%, however this is masking weakness under the surface as shown by the Russell 2000 which is down by 1.8%. Of course, this is a change in behavior from the last couple of…
months which was marked by outperformance in small and mid-cap stocks which dominate the universe of stocks under $10. But it is similar behavior to what we have experienced for the bulk of 2021 – strength in large caps while small and mid caps are range-bound.
Currently, I am seeing this as more of a pause for the market to catch its breath rather than any sort of meaningful inflection point.
Energy
Last week, I wrote about oil:
In fact, it’s fair to say that oil is possibly forming a double-top. Too soon to say decisively or with certainty but it’s something to monitor. Obviously, this would have implications for our energy positions and also would set up a nice buying opportunity after a pullback.
We’ve reduced our energy position, and my gameplan is to pay close attention to how it does as it hovers around the important, $85 level. A break above $90 and we could be at $100 in a blink and a break below $80, and we would have a chance to add back shares at attractive levels.
We ended up breaking $80 much quicker than expected and are currently at $77. Last week, I was confident about increasing energy exposure if oil got to the low $70s. This week, I’m not as confident.
First, I want to make clear that I still see oil going above $100 and possibly well above this figure during this bull market given that capex has been at low levels for nearly a decade.
BUT I see some reasons for caution in the short-term.
- We’re getting dollar strength, in part due to Fed tightening, which is putting downward pressure on the commodity complex.
- Oil has made a double top which tends to be an intermediate top even in a bull market.
- I’ve speculated that the bottlenecks in the economy improving could lead to some relief in energy prices.
- President Biden has talked about a coordinated release from the SPR.
- We’re seeing signs of increased shale production.
- Finally, energy was bid up on tight inventories and fears about a cold winter. So far, the weather has been quite mild and looks to be for the rest of November.
None of these are reasons to become bearish on oil, but they are certainly good reasons to be less bullish.
Still, this is a topic that I will regularly cover in these commentaries.
Silver Linings
I did want to note two positive news items that could also be opportunities for our positions.
One is that recent reports are showing a big improvement in the semiconductor situation which constrained auto production. At full capacity, the US can produce about 19 million cars. Last month, it produced 13 million.
This increase in auto production will be a major opportunity for certain companies that I’m monitoring.
Another is that while inflation remains a major concern and headwind. I see that on the margins, things are getting better. This is evident with the auto production issue as used car prices are…
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