Two weeks ago, I wrote my most important column of the year.
I didn't think much about it then.
I suggested that oil stocks might sell off due to overbought conditions.
And then... it happened today.
Everyone is clinging to the Fed speeches this week.
What will they say about interest rates?
What will they say about the economy?
Will they tank the market?
I'm here to tell you that the most important voice for the market this week isn't on American shores.
It will come on Wednesday... and this voice will determine whether the market rebounds in October... or the S&P 500 could collapse to 4,100 by October 15.
Energy Stocks on the Brink?
Did you notice anything about the energy sector today?
Anything?
The energy sector dropped 2.15% today... confounding most people across the financial markets. West Texas Intermediate crude slumped 2.3%, while Brent crude slipped nearly 2%.
So many people were shocked by this selloff. It goes against all of the big calls we've heard about energy for a month.
But... energy analysts said... "oil could go to $125 per barrel."
But... the banks predicted that there would be a massive bull market for oil stocks...
But... supply outweighs demand around the globe.
But... but... but...
Two weeks ago, I penned a column called "The Oil Counternarrative." At the time, I explained the odds of a selloff across oil stocks were increasing. I explained the importance of four technical indicators to watch.
And all four of them went negative on Monday morning (for the second time in three weeks).
Yes, I am very bullish on the prospects of U.S. oil stocks.
Yes, I expect oil prices to rise over the long term - especially as we witness incredible failures in the Green Transition.
But oil stocks don't go straight up.
After a rally that lasted more than 13 weeks (66 days) in positive equity momentum territory, energy stocks could be on the verge of a much bigger selloff.
So, what's happening here?
Warning
On Wednesday, OPEC+, the 23-nation alliance of oil producers, will meet at the annual Adipec summit in Abu Dhabi.
During the meeting, analysts anticipate proposals for further investment in oil production (there's a severe lack of oil production capital through 2027).
In addition, markets don't expect that OPEC will engage in further cuts to global production.
The question is how the market will react if OPEC states it will end its production cuts later this year.
OPEC is clearly in control of the global oil markets right now.
That was evident when oil prices skyrocketed after Saudi Arabia announced voluntary cuts to its production this summer while the U.S. dithered and continued to sell from its strategic oil reserve. The Biden administration has pleaded with the Saudis to increase production - and blamed Russia for the supply crunch.
Despite all the fist bumps and threats in the Middle East, it turns out that this administration's geopolitical energy strategists are bad at what they do.
Who'd have thought a bunch of Yale lawyers were bad at petrochemical wargaming against Russia and Saudi Arabia, the world's largest state-run oil producers?
All while they did everything possible to reduce future production investment in the United States.
Color me shocked.
Defining This Selloff
From an equity momentum standpoint, energy turned negative for the first time in 13 weeks. We watched the MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU), a 3x leveraged trading instrument that tracks the Top 10 U.S. Oil Companies, dump 6.1% today.
And the four indicators I discussed all turned negative this morning. But why?
Ahead of this meeting, the oil markets are dropping due to a combination of things. Take a guess at which is most important:
- Some funds are taking gains off the table ahead of OPEC's meeting.
- New investors aren't piling into oil stocks before this week's OPEC summit (a lack of buying pressure).
- Other investors are rotating capital to start the quarter.
- Oil stocks were overbought two weeks ago, as I explained by highlighting the NRGU, a 3x leveraged trading instrument that tracks the Top 10 U.S. Oil Companies.
- Interest rates continue to rise, driving the dollar higher against global commodity prices.
All five are critical. But out of all these factors, the most important one today, from my perspective, is No. 2.
Remember, momentum is a measurement of buying and selling, and buying collapsed today on our screeners.
Very few energy stocks across the entire sector are still breaking out, signaling a pause in fund and retail purchasing across the markets.
Simply put, there wasn't any juice left to squeeze.
Is a Repeat of June 2022 on the Way?
My worst trade ever came during the June 8, 2022 selloff across the energy sector.
Before this selloff, oil prices sharply rose at the end of the second quarter. One Wall Street analyst even proclaimed that the Russian War would drive oil as high as $300 per barrel.
But then - something funny happened.
In one quick move, oil stocks collapsed. The S&P 500 SPDR Energy Select ETF (XLE) plunged from about $92.00 to about $66.00 in less than two weeks.
You can see the sharp drop on the left side of the following chart.
Buying stopped that morning (like this morning). And then, selling pressure intensified in the largest selloff among hedge funds in 15 years.
When sellers overwhelm buyers, that's where negative momentum events get ugly.
Over those two weeks, the S&P 500 ETF (SPY) fell from about 419 to 365 in less than nine trading sessions.
Could this happen again?
It's depends on this Wednesday's OPEC meeting.
What to Do Now?
We're seeing a dramatic downturn with all the major pressures hitting the market. All 11 sectors in the S&P 500 are negative.
Interest rates are rising.
And we're facing a global refinancing crisis reminiscent of 1998, 2008, and 2018. The U.S. government must refinance about $7.6 trillion in short-term debt over the next year and finance a more than $1.5 trillion deficit.
And that's just the United States trying to fund its debt.
If you're in it for the long haul (and should be), hedging is a good idea. In negative momentum environments, I sell calls on existing positions, cut bait on some positions to offset gains, and look to see if we get another opportunity.
OPEC will decide the fate of the energy sector - the best-performing sector of the last few months. There could be a long way down if funds panic - just like in June 2022.
I view any major selloff in oil as a long-term buying opportunity.
And if energy momentum turns negative, we always play by the same six rules. We start to build positions if we experience.
Be sure to check them out, as they can help you set up great long-term positions in stocks you want to own.
Stay positive,
Garrett Baldwin
Secretary of Finance