I stayed up last night for too long watching U.S. Marshalls with Tommy Lee Jones. Before that, True Lies.
So, I’m naturally tired from all of the non-stop excitement that comes with 1990s action films whose “originals” were much better (although they are still both very good.)
I didn’t expect to wake up to a trading day with even more action. While Tesla and NVIDIA bulls beat their chests over the last few days, both stocks led to an undercurrent selloff that’s driving negative momentum.
A week after Cathie Wood called the Ark Innovation Fund (ARKK) the new “Nasdaq,” it slumped back under $40 per unit and looked poised for another brutal selloff.
But nowhere was it more evident than in the surprise of the day…
Russia’s decision to cut oil production in response to Western oil sanctions. This could create the biggest shakeup of the market in 2023.
A Global Oil Shakeup
Today, Moscow shook up the global geopolitical world with two major events.
First, Russian forces bombarded Ukraine’s power grid as it started an offensive in Eastern Ukraine. These attacks came a bit earlier than expected, given that most people believed Russia would start its surge against its neighbor.
The Wagner private army has bolstered its ranks with Russian prisoners receiving pardons and increased to 300,000 soldiers. This comes on top of the additional forced mobilization of troops that Moscow has relied upon in the last year.
Things are so bad in Ukraine that the enlistment age for its military defense has been lowered to 16 years old.
This war is only getting started as it enters its second year, and it will likely have a dramatic impact on key infrastructure that impacts millions of people in the region.
Round Two of this surge could be far worse than we witnessed last year. And for the most part, it feels like the market has been ignoring the story.
Meanwhile, Russia engaged in a surprise move today with its oil production.
The nation had been cooperating with OPEC for years to help control prices through work with the global cartel. But Russia’s oil shipments have faced sanctions and a price cap among Western nations, designed to undercut its profits and reduce the amount of capital the nation can deploy for weapons and equipment.
Russia said it would cut its oil production by roughly 5% next month, making good on its threat to reduce global supply in a world already plagued by inflation.
The decision will make it easier for Russia to push prices a bit higher and give them some market power over other buyers like China and India, who have gladly bought up its crude at a big discount.
Russia won’t be able to move the global markets. But they can make things a little inconvenient.
And it sets a precedent that Russia can set a precedent for further cuts, and raise the geopolitical stakes if OPEC decides to take any action on production to boost prices.
Will Energy Become the Crowded Trade in 2023?
Each year, investors always look for a crowded trade that fuels incredible momentum.
In 2021, investors piled into FAANG stocks while the Russell 2000 and the bottom 450 stocks on the S&P 500 traded sideways for the entire year.
In 2022, it was oil for the first six months and became a broad market short (long dollar) while it faced increased global liquidity pressures.
So far this year, the recent rally centered on buying any asset that wasn’t nailed to the ground.
Growth stocks had a nice run, but now they’re running out of steam as this market rolls over. But the renewal of Russia’s dual efforts today creates a unique possibility.
Remember, aggregate demand has been hammered on the oil front by rising interest rates and tighter consumer spending.
China’s economy is reopening, spurring demand that can increase prices globally.
Supply is increasingly under pressure in oil due to both a lack of capital and a lack of coherent energy policy.
The threat of geopolitical tensions (in both Ukraine, China, and the Middle East) invites investors to find value in the energy market while there is still time.
Long-term, energy stocks will benefit from improvements in the fundamentals.
But in the short-term, this could quickly become a crowded trade with significant upside if tensions accelerate and other sectors break down due to concerns about the broader market.
To your wealth,
P.S. Please let me know if you have any feedback, questions about today’s issue, or anything else. Just email us at firstname.lastname@example.org.
*This is for informational and educational purposes only. There is an inherent risk in trading, so trade at your own risk.
Market Momentum is Yellow
If you’re looking for value in the energy sector, join my Tactical Wealth Investor. With momentum in the Yellow territory, you’ll also get access to a free copy of my special report, “How to Trade Negative Momentum.” Right now, we’re seeing a significant amount of institutional selling that is slowly turning into a bigger selloff. Give it a little bit of time, and then watch it all come down rather quickly.