Humans are crazy.
If we’re not trying to profit from their irrational behavior – particularly in public markets – then what are we even doing here?
When our stress levels are elevated, our emotions get triggered.
And we behave irrationally.
We can see it, if we try, every day in the stock market.
And, when you add politics to the equation, the crazy goes up exponentially.
Skewed Expectations
My friend Ryan Detrick was talking about this chart of one-year inflation expectations by party affiliation over the weekend:
“Democrats expect 9.6% inflation in a year. Republicans were doing the same thing back in 2022.”
Ryan, who is the Chief Market Strategist at Carson Group, is trying to get a grip on how crazy this behavior is.
But this is what we would expect.
Humans are nuts.
And there’s money to be made because of that fact.
Low Energy
A bounce for the U.S. Dollar here could set in motion a series of market-moving events.
We mentioned yesterday that the 100 area for the U.S. Dollar Index (DXY) is the big one.
If the DXY is above 100, risk is to the upside.
From a sentiment perspective, that massive short position by the speculators in the futures market, coming into 2025, has completely unwound.
That was a big reason why we were buying gold and international equities in the first quarter.
That’s over now. We’re back to a more balanced positioning among speculators and hedgers in the futures market.
So think about the implications of a dollar bounce.
Here’s a chart of crude oil prices over the past couple of years overlaid with the U.S. Dollar Index:
I purposely left it unlabeled so you can see that you couldn’t even tell which one is which without me showing the labels and the Y-axis.
Here’s what that looks like:
When you zoom out you can really see how energy stocks as a sector have made zero progress since the Great Financial Crisis.
It’s the only sector, of all 11, that is still below its GFC highs.
It’s kind of insane when you think about it.
Financials and home construction – the culprits of that bear market back in 2008-09 – have come back and far exceeded those highs.
Keep in mind that energy represents only 3% of the S&P 500 Index, an even smaller percentage of the Dow Jones Industrial Average at 2%, and only 0.5% of the Nasdaq100. .
Americans just don’t have any exposure to this group
Just like no one wants dollars, no one wants energy.
And they’re dancing together.
We already had one energy stock in the portfolio. Last week we added a second.
And we’re likely to add a third in the coming days.
Stay sharp,
JC Parets, CMT
Founder, TrendLabs