Industrial Select Sector SPDR ETF (XLI)

I’m still following Tom Lee’s guidance:

STRATEGY: In our view, Energy stocks are still best risk/reward into YE
As we look into the final 4 months of 2021, we believe an “everything rally” is underway, one that will see both Epicenter ($XLE, $XLF, $XLI, $RCD) and Growth rally ($FNGS, $QQQ, $XLK). But among these, we believe Energy stocks are likely to lead.

Energy stocks are up +26% YTD, outperforming the S&P 500 by 700bp which is up 19% YTD. Energy stocks have endured a very rough two months, shedding more than 10%, as the delta-variant surge and the related second order effects hurt cyclical stocks. But the risk/reward for Energy is favorable, in our view:

– Oil just saw a “golden cross” on a weekly basis (CNBC flagged this) –> fuel for rally
– Energy stocks short interest highest level since the start of pandemic –> fuel for rally
– Oilfield services ETF $OIH has risen 13% even as ETF has seen redemptions –> fuel for further rally

In short, if the Delta-variant is receding (our central case), economic resilience will resume and this is a positive set up for Epicenter stocks. This is the reason we have seen Cyclicals rallying so strongly in the past week.

…WTI sees weekly “golden cross”
This CNBC tweet caught our eye Thursday. Oil has been resilient in the past week or so, but is off from a recent high of nearly $80. And the CNBC article notes that oil had a “golden cross” based upon weekly prices. A “golden cross” is when the 50-period moving average moves above the 200-week. The Miller Tabak Strategist, Matt Maley, quoted in the article views this is a positive development. Per the article, WTI has rallied in each instance.

Source: https://twitter.com/cnbc/status/1430916401238323200?s=21
The “weekly golden cross” took place sometime 3 weeks ago as shown below. And after initially continuing to weakness, Oil has reversed sharply higher this week.

…6 weekly “golden cross” since 1987, Oil rallied 98%, median 31%, 6 of 6 times –> implies $88-$90 WTISince 1987, WTI has seen 6 such weekly “golden cross” events as indicated below. Tireless Ken and the team calculated the further rally in WTI post the golden cross.

– 6 of 6 times WTI rallied further
– average gain +98%
– median gain +31%

U sing the median gain (because 2002-2008 distorts results), this implies WTI could rise to $88-$90 in the next 12-18 months. This is powerful upside and implies significant gains ahead for Energy stocks.

…OIH short interest surged to highest since start of pandemicOilfield services stocks, $OIH ETF as a proxy, have been particularly hard hit. And this is reflected by the parabolic surge in short interest:

– 1.479 million shares of OIH are sold short
– this is the highest figure since the earliest days of the pandemic
– 1.050 million shares sold 8 weeks ago, a big jump

…OIH current short interest essentially highest in 10 years
In fact, look at the 10-year history of OIH short interest. Outside of the months around March 2020, the current OIH short interest is the highest ever in the history of the ETF. And it is even worse than the period from 2012 to 2019, when OIH was essentially in a freefall.

– as famed market technician, Richard Russell, liked to say
– “all rallies start with short covering”

And with such elevated levels of short interest, this is a lot of firepower. Moreover, fundamentals and capital discipline for Energy companies is far higher than anytime in the past 10 years. Thus, investors are not necessarily “fundamentally” shorting Energy stocks.

– rather, more likely Energy is the most convenient group to short given their strong 1H performance
– and the associated vulnerability of Energy to an economic slowdown

Since we believe Delta-variant driven COVID-19 surge is peaking, we see less risk of a global slowdown.

…Lastly, OIH has rallied +13% in the past week, yet, OIH ETF seeing redemptions = impressive underlying strengthOIH is an ETF and ETF inflows and outflows also show up as changes in shares outstanding (S/O). We have plotted both the shares outstanding and also 10D change in shares below. A few thing really jumped out at us:

– since June, S/O fell -22% from 15.2 million to 11.9mm, or -3.3 million
– that is a tremendous decline

– OIH has rallied +13% in the past week
– S/O fell -300,000 in that period of time
– OIH has seen consistent redemptions for the past two weeks

We view this as particularly constructive, as OIH and oilfield services stocks have rallied even with investor outflows. Imagine how these stocks would perform if there are actual investor inflows.

Have you guys checked out BCO (Brinks) as a high quality industrial?
A target for acquisition by fin tech companies looking for stable cash flow and earnings. Would be complementary to their fin tech business model. Brinks has a wide moat, analysts are under estimating future earnings, they do much more than cash (think PM, other cashless instruments), and cash isn’t going away anytime soon despite what your read. Earnings are going up, not down, and the multiple is low.

Thoughts? I’m bullish XLI and several other industrials.