The Rally Isn’t Supposed to Make Sense

Rally Recession

Market momentum is Green. Despite higher CPECI inflation numbers and concerns about next week’s jobs report, we saw the markets charge higher again. The markets completed their best month since November 2021, and most traders wonder if “Bad news is good news.” Don’t worry about that. Enjoy the ride.

The three-day rally on the back of the Fed’s 75-point hike confused most people. But as I’ve recently explained, funds were VERY overexposed on the short side. As traders scramble for air, we’ve seen sharp covering on the short side. 

Look at the data, and you’ll be confused by this rally. The economy is in a recession. Full stop. I don’t care if Janet Yellen tries to spin the recent GDP data. The economy is in recession. The Atlanta Fed projected that Third Quarter GDP would be 2.1%. I’m happy to take the under. 

The Fed jacked rates up 7.5%, while the CPE inflation number was the highest since January 1982. The central bank may be aggressive again in September if inflation remains stubbornly high. Based on my assessment of rent prices and rising energy, I expect that will happen – and that we’re a long way off from 2% inflation – the Fed’s target number. 

Plus, the initial jobless claims hit their highest four-week average since November 2021. But still… the market screamed higher. What gives? FOMO, insider buying, and squeezing… on top of earnings numbers and outlooks just barely topping already lowered expectations. What a market. 

Commodity Push

I’ve said a few times that I’m bullish on oil moving forward due to the lack of capital in the sector and the efforts by banks to press harder on ESG provisions. It is surprising to see oil prices push higher despite concerns about a recession at first glance. 

But it makes sense when you understand the supply shortage that I’ve highlighted. There is ample opportunity right now to correct the narrative on oil with companies like Exxon Mobil (XOM), Chevron (CVX), Crescent (CRGY), Devon Energy (DVN), and Marathon (MRO). This remains a very positive sector with very solid inflows in the last week.

But don’t shy away from other energy sources as we move toward the fall. Yes, a recessionary pressure is in place, but this is largely a discretionary income recession driven by inflationary policy and poor economic management. Americans – and global citizens – will struggle to afford food and energy costs as they hold a floor. Those are people’s priorities as we move toward the winter months in the Northern Hemisphere. 

I don’t foresee a commodity crash happening soon, despite some of the direr warnings from Wall Street. We still have bad policies that ban petrochemicals and fertilizers around the globe. Food prices could soar because of these policies. 

Rally For What We Need

We still have a supply gap in housing because of policy (largely the desire to keep new construction on the sideline in major metropolitan areas). We will need more homes and need more lumber in the future. Look at Boise Cascade (BCC) and Louisiana Pacific (LPX).

We will need more fertilizer. Look at Intrepid Potash (IPI) and Mosaic (MOS). And… again… because it bears repeating…

We need more oil. U.S. energy companies continue to benefit because of bad policy. Even if they don’t drill more oil, they can generate cash flow, pay down debt, increase their dividends, and buy back stock. Companies in the Permian Basin in Texas continue to benefit from scale and lower their breakeven prices. 

I recently read that Conoco-Phillips (COP) has a breakeven price in the Permian at $40 per barrel. I LOVE THAT COMPANY, especially as it benefits from its strategic deals in natural gas as well. 

Look at Devon Energy (DVN). Take a look at Occidental Petroleum (OXY), a company being swallowed up by Warren Buffett’s money. Look at Exxon Mobil (XOM) and Chevron (CVX), which shattered earnings expectations this morning.

We need real assets. We are moving away from things we want to things we need, and capital is moving in that direction.

Don’t be afraid because of recessionary pressures. Look to sell puts on stocks like the ones that I’ve mentioned. And remember that momentum is positive – right now – in all sectors. This is a great time to trade. It might not last long, but it’s a short window to make money. Let’s be aggressive and pick the things we NEED…

Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.
Garrett Baldwin
Garrett Baldwin
Garrett Baldwin joined Godesburg Financial Publishing as Chief U.S. Markets Analyst in early 2021. A Johns Hopkins-trained Economist, he’s worked with hedge funds, venture capital firms, angel investors, and economic advisors to the U.S. government. Baldwin specializes in market anomalies and alternative investments. He’s written extensively on momentum, value, insider buying, and other unique strategies that provide investors that elusive edge.

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