Climate change topics are dominating social and traditional media as areas of California larger than Manhattan are ablaze. The fires have amplified attention on the role fossil fuels play in our world. And now, some research is pointing to the impact of smartphones on energy usage and the environment. The natural world is a complex system and is going through a significant transition that probably would be happening irrespective of humans. But, the activities of 7.6 billion humans it is making it much, much worse. An underappreciated reality is that transitions in complex systems are swift and sudden. When it actually arrives in full force, will we be prepared? And what does preparation look like? Is the best course of action to fight nature or to get out of its way?
In financial markets, fossil fuels and technology may be experiencing their own “climate change” moment.
Crude Oil’s Latest Losing Streak: U-OPEC or China?
Market watchers were agog last week with news that Crude Oil fell for a 10th straight day, the longest daily losing streak since 1984. This harkens me back to my post from August 2015 when Crude fell for 9 straight weeks! The 22% drop from early October highs has occurred in the face of reinstated Iranian sanctions by the Trump administration. What gives? The debate seems to be whether U-OPEC (US, Saudi, Russia, Iran, etc.) actions in support of prices or in support of conflict (same thing?) can overwhelm likely shrinking demand.
Analyzing oil demand requires an exploration of the Chinese economy. In case you didn’t notice, the Shanghai Stock Index is down 57% from its October 2007 high, down 50% from its June 2015 post-crisis high, and down 21% YTD! Yet, since 2008, China’s reported GDP has tripled since 2008. Huh? There is a lot to unpack, including capital flows, debt, housing, and even geopolitics. While I argued here in late 2016 that China’s geopolitical hand was weaker than conventional wisdom suggested, the relatively muted Chinese leadership reaction to aggressive Trump administration tariff policies has surprised me. Something is off with the Chinese economy. I will dig into this in future posts.
Price Has Memory in Crude Oil
I’ve talked before about how price has memory. This is an interesting feature of markets. Certain price levels become important because market participants (and algorithms they build) recall actions at those levels. For example, those that bought at a top or sold at a low may opt to not do the same thing. Price Memory has been very strong in Crude Oil markets. In 2015, the market steadied around the 2008 lows. This year, the market topped (at least for now) around the intermediate peak of July 2006 (which presaged the dramatic 2008 rally to over $140/barrel).
Current levels seem important. The market temporarily stabilized in May-June of 2015 around current prices levels, after the stomach-churning drop of 2014 highlighted by Crude Oil’s Thanksgiving Day Massacre. On the flip side of 2006 action, the market also temporarily stabilized around these price levels in early 2007, prior to the rapid rise to $140+. Those who regretted buying the 2015 rally, those who regretted selling the 2007 drop, and everyone else in between (human or not) will recall their actions at these price levels. This will influence market action in the days and weeks ahead.
Technology Stocks: Leading the Transition or Buy the Dip?
Last week, I wrote about an early warning signal for a major transition in US Stocks. Markets “rewarded” that post with a rally, capped by a stirring rise after US voters delivered divided government on Election Day. Bulls began rallying around a Santa Claus and post-midterms rally.
Looking at traditional technicals, while the S&P and NASDAQ both fell below their 200-day moving average (a widely followed technical level, especially in hindsight) during the October rout and both regained that level on Nov 7th, the NASDAQ fell back below on Nov 9. Also of note, small-cap stocks have remained below their 200-day and were unable to retest from below. These levels tend to attract a lot of attention, again because Price Has Memory. During major transitions, after some period of vacillation around memory price levels, we can expect a dramatic and sharp move away.
On the fundamental side, so much of the important activity in tech is driven by private companies that a convergence of public and private valuation frameworks is inevitable. One fascinating perspective here by Tomasz Tunguz, a venture capitalist at Redpoint. He suggests the use of ARR (annual recurring revenues) multiples to value high-growth public software companies, just like their private brethren. There is much debate about whether we are at a near-term top in tech. This is but one perspective.
I allude to technicals and fundamentals to highlight the debate ensuing about market direction. At major transitions, these models degrade, and the path forward can be determined by less data, not more. Along those lines, as I argued last week, this is a critical moment in financial markets and you don’t need a lot of data to embrace caution. I remain confident that November is the most important month of the year for US stocks. Price action will validate the efficacy of the algorithm’s call, but up or down, this should be a November to remember.
Any opinions or forecasts contained herein reflect the subjective judgments and assumptions of the author only. There can be no assurance that developments will transpire as forecasted and actual results will be different. The accuracy of data is not guaranteed but represents the author’s best judgment and can be derived from a variety of sources. The information is subject to change at any time without notice.