Something Clicked In The Market Today

Call it a hunch, but something clicked in the market today. I had this exact same feeling back in June. It was immediately following the Fed rate hike announcement, and the market price action screamed out to me that the market expected the Fed to be successful in fending off inflation. From then to today, oil prices have not performed well falling from $120 down to $83. 

But something changed today, something clicked. The SPR rumor that the Biden administration may contemplate refilling at $80 doesn't need to be true for this to have an effect. All this rumor needs to do is to force a perception that the Biden administration is even contemplating refilling SPR. The price here is irrelevant, the fact is that from a trader's perspective, the simple thought of a possible refill down the road implies asymmetry to the upside. And that's more important.

In addition, the reason why something clicked today is that if you look at the CPI print. Despite falling energy prices, service inflation is getting stickier. Higher rent will start pushing CPI higher and when oil prices rebound as demand wasn't anywhere as bad as we had thought (thanks to June data), then inflation will only worsen. This means that the Fed will have no choice but to keep at it (i.e. rate hike/QT), which means that the broader stock market will continue to drift downward, and money managers will be forced to allocate into inflation-proof names. Did someone say energy stocks?

Again, the key to all of this is to understand how the market is perceiving things. If the market had originally thought that inflation was going to be over and that the Fed will be successful, then cyclical and value stocks will sell off, and growth names will return. But if now the market believes otherwise, then energy, value, and cyclical stocks will rally, and growth stocks will sell off.

In addition, because the market now believes that inflation isn't going away anytime soon, then CTA and macro hedge funds will have to re-enter long oil trading positions. And with open positions at multi-year lows, you can see where I'm going with this argument.