Cycle Investing: The Oil Trade and the Reflation Trade in the Current Market Cycle
The oil trade continues to perform exceptionally well, with the price of crude oil rising slowly but steadily. Our first target of $90 is likely to be hit soon, after which we could see a consolidation phase. Once we exceed $95, the path is clear toward the 2022 highs, marking a strong progression in the current market cycle.
The COTs: Strong Support for Rising Oil Prices
The COT data (Commitment of Traders) continue to support the thesis for rising oil prices. The positioning of managed money (green) has increased slightly due to the recent rally but still leaves plenty of room for further upside. The commercial positioning is rolling down from a high level, which is exactly what we want to see in a cycle investingstrategy.
Commodities, Oil, and the Inflation Trade
The latest BofA Fund Manager Survey reveals a significant underweighting in oil and commodities by fund managers. According to the survey, fund managers are heavily invested in bonds as part of a disinflationary play, while energy and commodities are underrepresented.
Interestingly, the survey also shows that expectations for rising inflation are still at a 20-year low. No one is positioned for the inflation trade we have been betting on, which presents a fantastic opportunity for a massive rally in commodities.
At the beginning of the year, we made a bold call that the next major trade would be the second wave of inflation, and it is already unfolding. This reinforces the foundation of our Cycle Investment Strategy.
Cycle Investing: The Reflation Trade
Our thesis on cycle investing and the reflation trade is playing out. As inflation accelerates, we are seeing the benefits of commodities as they are positioned to outperform other asset classes. Our call in January about a reflationary phase is well-supported by the current market conditions, with oil, gold, and silver all benefiting from these macroeconomic shifts.
Geopark: Our Favorite Oil Play
Geopark, our preferred oil play, continues to perform well, crossing above the 200-day moving average with strong volume. The stock has now reached a multi-month high, aligning perfectly with the cycle investing approach.
Silver: A Consolidation Waiting to Break Out
Silver has formed a massive consolidation pattern. Given the impulsive rally in gold, it’s likely that silver is not far behind from breaking out. The gold-silver ratio shows just how little silver has participated in the rally so far, despite bullish fundamentals supporting the metal, including a substantial supply deficit.
The COT data for silver suggests room for upward movement, even though some Twitter analysts may view the reduction in commercial positioning as bearish. In reality, the biggest rallies often start when commercial positioningrolls down from overbought levels, similar to how RSI behaves in charting. Now is the time to be invested for the next big move in silver.
Palladium: A Potential Short Squeeze
Palladium prices are moving in the right direction, supported by a strong RSI and a bullish volume profile. The COT positioning indicates an imminent rally, with commercials significantly net long and managed money heavily short. This sets the stage for a potential short squeeze opportunity in palladium.
The Reflation Trade: Commodities Are the Focus
2024 has performed excellently so far, and we remain bullish on commodities. As cycle investors, it’s important not to take profits on every upward move, as commodities tend to stay in an impulsive upward trend much longer than equities or currencies. We are only just leaving the base after a long consolidation, and the potential for growth in commodities remains high.
Don’t Touch Duration Bonds: Stay Focused on the Right Assets
In this market cycle, it remains important not to invest in long-duration bonds. Bonds typically do not perform well in inflationary or stagflationary environments, especially when commodities and precious metals are on the rise.
Conclusion
The current market cycle offers substantial opportunities, particularly for those following cycle investing principles. With commodities, oil, and precious metals set to benefit from the ongoing inflationary pressures, this is a great time to stay invested in assets that are poised for significant growth. Silver, palladium, and Geopark remain strong plays in this cycle investing strategy, and we continue to see massive upside potential.
Happy Easter and all the best,
Cycle Investment Strategy