đRed Flags In The Market + 2 Stock Picks
Share issuances signaled peak Dot-Com mania
Welcome back to MktContext where we study the US economy and time the stock market.
Current stock market timer: BULLISH
Markets rallied sharply on Trumpâs announcement of a forthcoming deal with Iran. Oil prices have already been in a steady downtrend of late, barely reacting to confrontation. This weekâs news sent oil straight down.
And yet the consensus of Wall Street analysts remains the same: Oil to $200, unchecked inflation, possible global recession.
Readers of MktContext know that we have been bullish on the Iran deal, bearish on inflation, and bullish on the economy. By understanding this context, we were able to buy SPX near the lows in early April. Weâve been riding the bull ever since. We are still holding and expecting new highs.
Todayâs topics: Iran deal, gold trade update, tech red flags, inflation, positioning unwind, 2 stock picks.
Iran deal
Markets rallied sharply on Trumpâs announcement of a forthcoming deal with Iran. He canceled a scheduled strike (âweâll hit Iran very hard tonight!â) and cited rapid progress on a memorandum of understanding (MOU).
As is often the case, the language used by the President was vague. Agreement âpretty much wrapped up.â Documents at a âfairly final stage.â No concrete deadline given.
Iranian news media denied approval of the final MOU text; however, the Foreign Minister Abbas Araghchi made a statement that the MOU has ânever been closerâ. It appears that authority is still scattered over there.
Does this mean we should doubt the deal? No. The terms of the agreement might not be as expected (US likely made concessions, especially on nuclear) but the deal will be concluded one way or another. Threats of bombings are nothing more than pressure tactics to nudge the opposition to sign.
The key dynamic to understand is incentives. Trump canât actively initiate war without congressional approval (which will likely fail) and he is hamstrung by the upcoming midterm elections. Inviting retaliation at this stage of the conflict is a losing proposition.
Oil prices have been in a downtrend well before this news hit the tape. The concerns around oilfield shutdowns, long espoused by Wall Street analysts, appear unfounded. In actuality, oil demand has shrunk and supply has circumvented the naval blockade.
Every day there are more reports of tankers transiting the Strait despite the ongoing blockade (image below). Some are paying Iranâs toll. Some are guided by CENTCOM. Some are âshadow fleetâ avoiding detection. Regardless of how, oil is flowing. A deal with Iran, signed or not, is merely a sideshow.
Gold short
The gold short trade we gave last week is in the money. Due to the sharp drop in price and spike in volatility, the put options paid off more lucratively than outright GLD shorts.
Note the similarities with the oil chart from earlier.
If you havenât already, we would recommend taking profit on the bulk of this position, leaving a small runner for further downside. The reason is because interest rates have stalled their rise, oil prices are falling, and the recent positioning unwind may soon be over (more on that later).
Itâs significant that gold is falling alongside stocks. Gold is supposed to be the safe haven asset, the defensive holding that everyone flocks to in times of stress. But right now, investors are forced to raise cash. And that creates an entirely different dynamic.
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Red flag share issuances
Inflation still tame
Positioning unwind
Technicals and our portfolio
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