November 21, 2016

The major stock market averages opened higher this morning (Dow +46 pts; SPX +.5%). In fact, the SPX briefly touched its all-time high set back on August 15th, and the Dow recently achieved a fresh all-time high. We’ll see whether it can break through resistance. Energy stocks are leading today (+2%) as oil prices surge. But gains are pretty widespread (gold miners +2.8%, retailers +.3%, tech sector +.7%). And the defensive sectors are bouncing back as well (utilities +.8%, consumer staples +.3%). The VIX Index is trading below 13. The dollar is a bit weaker on the day and WTI crude oil is back up to $47/barrel. Bonds are modestly higher on the day, rebounding a bit after taking a beating this month. The 5- and 10-year Treasury yields are trading at 1.77% and 2.32%, respectively. 

According to Baker Hughes, the number of active US oil drilling rigs rose by 19 to a total of 93 last week. The “rig count” has been rising for 5-6 months. As oil prices recovered from $26/barrel to around $47/barrel, more and more rigs have become profitable. Increasing supply, of course, should drive oil prices lower. But the market is fixated on Saudi Arabia’s proposal to limit OPEC oil production near current levels. Today, an Iranian official “signaled optimism that OPEC will agree to a supply-cut deal…” OPEC is learning that words are all that is necessary to prop up oil prices. Now, if OPEC does somehow reach a deal to actually cut production—even slightly—Wall Street strategies are predicting a quick surge in oil prices above $50/barrel. 

Fundstrat equity strategist Tom Lee says the market is going through a huge rotation, with investors sucking capital out of bonds and bond-equivalent stocks and shifting into growth. The Federal Reserve looks figures to resume interest rate hikes, and at the same time inflation expectations are rising. “In a normalized rate world, equities is a great business.” The election seems to have served as the catalyst to get the rotation going. Mr. Lee posits investors are betting the Trump Administration will offer a more passive regulatory environment that will be conducive to growth. He says the current administration has allowed a 25% increase in federal regulatory staff recently. By the way, as evidence for this Trump Rally and stock rotation, we’ve just seen the largest 7-day equity ETF inflows on record. 

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