Market Themes YTD 2016 - Finding Opportunity

Here is a brief review of some of the primary themes established in early 2016, and a quick description of how we aim to take advantage.

 

First and foremost, we have had a good bounce off the February bottom – roughly a 10% rise on the S&P 500. With the volatility of the January-February selloff, we expected a violent rebound similar to the one that occurred. The old highs on the index are the mid 2100’s range, and if we have a rest or a sideways consolidation now, that would be healthy – we would be unsurprised to go right back to the old highs. Currently, we think there is roughly a 50% chance we fail – if we breakout to new highs, we could have a great year ahead.  Intuitively, the environment feels good right now, as investors are sitting on a lot of cash and we think it is pretty easy to move higher. We simply strengthen the weakest part of the market: energy, and consequently should be in good shape to breakout to new market highs. During February, we added a small amount of stock in the commodity space.

 

(Source: Bloomberg)

 

We think there is a high probability this double bottom in crude oil will hold, and the positive sentiment of having a bottom behind us will strengthen morale in the weakest sector of the market. Twice in a month the bottom was tested, and it held – inventories of oil continue to build, and oil rallies? The fact that oil declined from $100 to $26 is the real focus, whether the bottom is $25 or $20 is irrelevant when the big move from $100 down roughly 70% is behind us. We have added a bit of Whitecap at a $29 crude price.

 

(Source: Bloomberg)

 

As a bottom is formed, we think it the price of oil will re-enter the range of $40-60:

 

 

(Source: Bloomberg)

 

Currency movements are paramount. This chart shows the USD/CAD compared to oil – as oil strengthens, the USD has fallen.  We can see clear evidence of a short term USD top, as oil double bottomed and the USD dropped significantly vs CAD.  We have moved some funds from the US back to Canada, and invested some in oil and potash. We are comfortable owning USD long term, but over 2016, we expect it to lose vs the value of oil and the CAD.

 

(Source: Bloomberg)

 

We have had a very eventful start to 2016 and our view is that markets are likely trade-range bound until crude bottoms.  We have no idea if crude has bottomed or not, but if so, we think we could see a pretty good year ahead of us.  We could see the energy sector rally, and that would remove the market’s primary uncertainty – once removed, we would expect to see new highs.  If we turn back down in oil and break the lows, we will have another correction in markets.  We have endeavored to take advantage of a possible rally in the energy and commodity space by buying some of the aforementioned sectors and repatriating some USD back to CAD around the 1.40 level.

 

Please give us a call if you have any questions.

 

Chris Stuchberry, Portfolio Manager

416-572-5429 

 

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