Tuesday morning brought us both month-end as well as mixed messages… Markets fell overnight, rallied on Europe’s open and then faded again as U.S. traders sat down at their desks.
These mixed messages mean we need to mix up our Fortune Research weekly watchlist.
But at least you’re getting a good price on the United States Natural Gas Fund (NYSEArca: UNG).
As I said Monday, energy could correct more, so keep position sizing small and keep lots of dry powder — cash on hand to invest when the time is right.
At any rate, the omicron variant is being bandied about by financial media as the culprit…
It certainly spooked Federal Reserve Chair Jerome Powell, who testified Tuesday before the Senate Banking Committee.
“The emergence of the omicron variant poses downside risks to employment and economic activity,” Powell said, “and increased uncertainty for inflation.”
Frankly, I’m less concerned about omicron. While it is more transmissible, it appears less deadly.
That’s a good thing.
But I am concerned about how the Fed responds to omicron, and what that means for our Fortune Research weekly watchlist….
The Fed’s Response to Omicron
Prior to omicron, the Fed was deliberately telegraphing a taper of asset purchases toward year-end.
Now, per Powell’s baffling testimony, it appears it’s encouraging Powell to accelerate tapering. That’s the opposite of what we have come to expect from a dovish Fed.
As best as I can tell, this is a feeble attempt to pull forward a hawkish action so it can reverse later when the economy genuinely slows.
Ironically, it could wind up slowing the economy now.
The market is certainly thinking that with the S&P 500, Nasdaq 100 and the Russell 2000 all down over 2% and falling as I write this.
Moreover, consumer activity could have already peaked heading into the Thanksgiving holiday. Normally, we see huge spikes in activity relative to the baseline on Black Friday.
This year?
Crickets…
Source: Google
We’ll have to wait a couple of days to see if there’s a rebound, or if e-commerce and supply chain bottleneck worries pulled all that demand forward.
But 12% below baseline is not a good look for the biggest shopping day of the year…
Fortune Research Weekly Watchlist: Nov. 30, 2021
Given this consumer pullback, the fact that inflationary assets like oil are now dis-inflating to higher lows… and that small-cap stocks are underperforming large caps… market signs are pointing to a repeat of summer stagflation.
That means the latest Fortune Research weekly watchlist has a lot of changes…
Oil is the first one to go. Volatility in crude has broken out to levels we haven’t seen since it went negative last year.
Source: Bloomberg
Natural gas and coal stay for now, as winter is still coming while we remain undersupplied of both.
I still want some retail exposure as we wait on consumer data to come in. As such, Petco Health & Wellness Co. Inc. (NYSE: WOOF) and Caleres Inc. (NYSE: CAL) remain despite weakness. If we see a rebound in the iShares Russell 2000 ETF (NYSE:Arca: IWM), we’ll see it in some of these single names as well.
But we need some exposure to technology and industrials, so in come the Nasdaq 100-based Invesco QQQ Trust Series 1 (NYSEArca: QQQ) and the Industrial Select Sector SPDR Fund (NYSEArca: XLI).
On the short side, one of the ideas we’ve been pushing — China — has worked fantastically, with the Direxion Daily FTSE China Bear 3X Shares (NYSEArca: YANG) showing an 18% return over the past month.
Source: Bloomberg
But with China’s Purchasing Managers Index showing a month-on-month increase, it’s time to set it aside.
Source: Bloomberg
The same goes for shorting gold, which has worked, and shorting bonds… which worked occasionally.
If the economy really is transitioning, we need to figure out which direction it’s headed first.
Updated watchlist below…
Source: Bloomberg
All the best,
Matt Warder
Fortune Research
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