A historical risk-off signal could soon flash… U.S. says “no thanks” to socialist oil… But seasonality says Biden’s about to see some gas-price relief… A “perfect” trade to watch closely…
By Michael Salvatore, Editor, TradeSmith Daily
As I write, the S&P 500 is at 5,046, down from its all-time high of about 5,231 set at the end of March.
Do you know what that means?
If you’ve been a close follower of TradeSmith Daily, you very much do.
If we’re following the strategy, that means put everything and the kitchen sink into 10-year Treasurys as soon as we see that drop… and leave it there until we’re within 5% of all-time highs again.
Just looking at the chart, we’re alarmingly close to this risk-off zone…
And while this recent correction might indeed be a fake-out or a simple breather, history shows that being overly cautious doesn’t cost much.
As we said when we first showed you this strategy…
From 1925 to today, [using this method] would’ve earned 9.6% per year… where a traditional buy-and-hold method earns you 10%.
Slightly lower returns, but get this… Your portfolio volatility falls by almost half, from 18.6% to 10.8%. And the maximum loss on your portfolio fades significantly. You go from a portfolio trough of 83.6% to just 29.1%.
Reason being, this cautious mode of investing eliminates the downside risk of large corrections and bear markets. It would have dodged the ’22 bear, the ’08 Great Financial Crisis, the early aughts dot-com bubble, Black Monday in 1987 (if you were quick enough), the Lost Decade ’70s, and even the Great Depression in 1929.
As soon as investors start to sweat, you’re already cashing out and stuffing dollar bills under your mattress.
Do you miss out on a tiny slice of returns this way? Yes. Do you sleep well at night? Better than any baby.
For those in or near retirement, a strategy like this is a great way to minimize the financial and mental anguish that comes with prolonged losses. It’s something to consider.
❖ Another opportunity to refill the Strategic Petroleum Reserve goes out the window…
We’ve covered the situation with the SPR beforein these pages. When it was originally built up in the 1980s, it was meant to be an emergency stockpile during war and other times of crisis.
Since the build, barring a few relatively small taps in between, it’s only gone up or sideways. But the Biden administration began a much larger drawdown in early 2022 to combat high gas prices (and, being real, the stickers plastered on gas pumps of Biden pointing at the price and saying “I did that!”).
Here’s the latest level, roughly halfway down from the highs.
The SPR has started to tick back up, even as gas prices have climbed closer to that painful $4 level.
But one unusual plan to help refill the SPR is falling apart.
❖ Biden says “no democracy, no deal”…
Back in October, the Biden administration met with officials from the Venezuelan government in Barbados.
It sought to tap Venezuela’s vast oil capacity by crafting a deal to lift long-held oil sanctions against the country temporarily.
In exchange, the deal was President Nicolas Maduro would take steps to host a fairer July election in the country.
Maduro, a socialist dictator who’s clung to power for 10 years, has largely failed to comply with the agreement, and so the U.S. is set to reimpose those sanctions.
I’ll add that, thanks to my better half, I’m good friends with several Venezuelan natives. None of them find this development surprising, nor hold a scrap of sympathy for the political leadership of the country they otherwise adore.
Either way, this means a potential new supply of oil to refill the reserve, and broader oil & gas business activity in South America, is shut down.
At least for some. Notably, Chevron (CVX) is excluded from the sanctions due to agreements that predate the so-called Barbados agreement. That gives them a slight edge, at least for the time being, as being the only major U.S. oil producer permitted to work in the region.
So, let’s take a look at CVX’s rating in TradeSmith Finance:
CVX boasts a rock-solid 90 on the lagging only in the growth department – as expected for a quarter-trillion-dollar oil major.
Its Ratings Gauge also shows the stock is in great shape on a few other metrics – with an overall Strong Bullish rating of 93. It being in the Green Zone, being part of four billionaire portfolios, and the Trade Cycles indicator showing an upcoming peak pattern all contribute to this.
But the takeaways go beyond this one company.
A major plan to refill the SPR is now out the window. That means we could see higher gas prices… which tend to correlate with the kind of civil anguish that shifts odds from the incumbent in a U.S. election year.
The Michigan Journal of Economics recently published this finding, which shows Biden’s disapproval rating has strongly trended with gas prices over the course of his presidency:
Is it the only factor tipping the election? Not even close. But it does give the challenger, former President Trump, an edge worth noting.
❖ We should add, the seasonality indicator shows a ray of hope…
Before we move on, let’s tackle the question of seasonality for oil prices.
As we’ve seen, it has just as much of a potential impact on your gas bill and the election as it does on stock prices.
Here’s the Trade Cycles seasonality indicator for the United States Oil Fund (USO) – which invests in oil futures contracts, making it a good “oil proxy” – during election years:
As we can see, Biden may be about to get some relief. USO tends to see a drop as we enter the second half of April before recovering somewhat in the summer months. From here through Election Day, though, we see an average fall of over 20% – with a 100% accuracy rate.
You’ll hear more about this on Saturday in an interview I just recorded with Trade Cycles editor and seasonality expert William McCanless, but seasonality has a funny way of writing history before it happens.
If our indicator says oil is truly set to drop, and soon, we shouldn’t be too surprised if some kind of oil supply breakthrough rips through the headlines before the end of May.
