Where Have the Bulls Gone?
The S&P 500 has continued its listless drift sideways this year, and sentiment has begun to take notice. Bullish sentiment exited 2023 at elevated readings with close to half of all respondents to the weekly AAII survey reporting as bullish, but since then, that reading has dropped down to 40.4% this week. That marks the lowest reading on optimism since the first week of November when it was a much more muted reading below 25%.
In turn, bearish sentiment has begun to pick up. 26.8% of respondents reported as bearish this week. That is only the highest reading since the first week of December and would need to climb another 4.25 percentage points to reach its historical average.
With the inverse moves in bulls and bears, the bull-bear spread has fallen to 13.6. While bulls have outnumbered bears for 11 weeks in a row now, this week’s reading marks the smallest margin during that span.
Not only is the AAII survey showing the least bullish sentiment in about two months, but so too are the Investors Intelligence survey and the NAAIM Exposure index. Plugging each reading into our sentiment composite shows that aggregate sentiment has quickly gone from sitting over a full standard deviation more bullish than the historical norm down to barely bullish readings in less than a month.
Jobless Claims Seasonality Not What It Used to Be
Among a number of better than expected economic data points this morning was initial jobless claims. Seasonally adjusted claims were expected to rise to 205K from an upwardly revised level of 203K last week. Instead, claims were much healthier than expected, dropping all the way down to 187K. As shown below, that puts the indicator within 5K of the late September 2022 low of 182K. Zooming further out, that is also one of the strongest readings on record, ranking in the first percentile of all weeks since the start of the data in 1967.
In reality, before seasonal adjustment, claims are much higher at 289.2K as the reading is currently working off a seasonal peak. However, that is not to say claims are weak. As shown in the first chart below, versus comparable weeks of the year going back to 2004, this most recent reading was only slightly above where they stood this time last year. In fact, that reading last year currently stands as the record low for the second week of the year of all years going back to 1967. Looking ahead to next week, another week-over-week decline is more than likely given it is the week of the year with perhaps the strongest seasonal tendencies. Going over the history of the data, there has not been a single time that NSA claims have risen week over week in the third week of the year.
As previously mentioned, claims tend to spike to seasonal highs around now, and there has been only one previous time that NSA claims have been lower in the second week of the year, and that was in 2023. But looking back over the past several years shows that the strong reading on claims for this time of year even pre-dates COVID. As shown below, in the 50 years from 1967 through 2016, the second week of the year averaged 656.5K for NSA claims. But since 2017 (excluding 2021 when claims were an outlier with far more elevated readings due to the pandemic) those same weeks have averaged a significantly lower reading of 340.3K. Put differently, the seasonally elevated level that claims have begun the year at is not exactly what it used to be.
Looking at things from another angle, below we show the percent change in NSA claims during the period that the indicator has historically experienced its seasonal runup, lasting roughly from September through the first couple of weeks of the new year. As shown, since the late 1990s, that seasonal climb has been trending smaller and smaller in size. All together, that means there appears to have been some structural changes in seasonal patterns over the past couple decades (which could also have implications for the seasonally adjusted number understating). As a result of a smaller seasonal spike, claims have spent the first few weeks of the year at lower levels than may have been the case in the past.
Finally, we would note that in addition to strong initial claims, seasonally adjusted continuing claims have also continued to roll over, totaling 1.806 million last week. That was a solid decline versus 1.834 million the previous week compared to an expected increase to 1.84 million. That also sets a three month low in continuing claims.
Bespoke’s Morning Lineup – 1/18/24 – Strong Data
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“The man who wants to lead the orchestra must turn his back on the crowd.” – Captain Cook
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It’s looking like a much more positive start to the day than many others recently as the S&P 500 is indicated to open up by about half a percent, and the Nasdaq is looking at a 1% gain. A strong batch of economic data has put a little bit of a damper on things as rates ticked higher, but outside of the Dow where a large decline in UnitedHealth (UNH) is weighing in the index, the start of the trading day at least looks to be positive.
As far as the economic data is concerned, both Building Permits and Housing Starts came in better than expected, initial jobless claims dropped to 187K for the lowest reading since last January, continuing claims also beat, and even though the Philly Fed report was weaker than expected (-10.6 vs -6.5 expected), it wasn’t near the disaster that the Empire Manufacturing report was earlier in the week.
Anyone who was expecting a continued broadening out of the market in 2024 has been majorly disappointed by how the year has started. Eleven trading days into the year, the cap-weighted S&P 500 has declined 0.64%, but the equal-weighted version of the index is down much more with a decline of 2.55%. That puts the performance spread between the two indices at 1.91 percentage points and represents the widest performance gap eleven trading days into the year in favor of the market cap weighted index since at least 1990.
It may sound hard to believe, but this year’s outperformance on the part of the market cap weighted index ends a streak of three years where the equal weighted index outperformed the cap weighted index at the year’s outset. In two of those three years, the trend reversed for the remainder of the year as the cap weighted index outperformed the equal weighted index, including last year where the gap in favor of the cap weighted index was the second highest of any year since 1990 trailing only 1998. Looking more broadly, in the 34 years since 1990, the direction of the performance gap between the cap weighted versus the equal weighted index eleven trading days into the year continued in the same direction for the remainder of the year less than 60% of the time. In other words, it’s hardly set in stone that just because the cap weighted index came out of the year strong this year doesn’t necessarily mean it will continue for the remainder of the year.
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Bespoke’s Morning Lineup – 1/17/24 – Busy Economic Calendar
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“We must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex. The potential for the disastrous rise of misplaced power exists and will persist.” – Dwight D. Eisenhower, 1/17/61
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
It’s not a pretty morning for risk assets as Asian stocks, specifically China, were down sharply overnight, and Europe is down sharply this morning after ECB President Lagarde followed the lead of US central bankers when she noted that rate cuts aren’t likely to start until the Summer and UK inflation came in higher than expected. Here in the US, it’s a busy day of economic data. Retail Sales and Import Prices were just released, and they both came in higher than expected. On the docket, we have Industrial Production and Capacity Utilization at 9:15 and then Business Inventories and Homebuilder Sentiment at 10 AM.
When comments like the above are made today, the people making them are often written off by the mainstream as candidates being on the fringe, but President Dwight D. Eisenhower made the statement above as part of a nationally televised farewell speech from the Oval Office when his approval rating was just under 60%. Eisenhower’s concerns stemmed from the fact that after multiple major wars, the US defense industry was becoming a much larger share and player within the US economy, and he was pointing out that as its size grew, so too would its influence.
During Eisenhower’s last year in office (1960), total US defense spending, according to the World Bank, was $47 billion. Within 16 years, defense spending had doubled, and just six years later, it had more than doubled again to over $220 billion. Under Reagan, spending steadily increased and reached a short-term peak in 1990 at $325 billion. For the remainder of George H. Bush’s term through most of Clinton’s entire time in office, total spending actually drifted lower but then surged exponentially after 9/11. Spending then generally declined for most of Obama’s time in office and then ramped back up again after Trump came into office (“When I took over our military, we didn’t have ammunition”). As of 2022, the latest year of available figures, total defense spending in the US reached $877 billion, or more than 18 times the level during Eisenhower’s last year in office.
While it may look as though defense spending has only become a larger influence on the US economy since Eisenhower left the Oval Office for the last time, when measured as a percent of GDP, defense spending has generally been on the decline. During Eisenhower’s last year in office, total defense spending equaled about 9% of GDP, and through the decades steadily declined to a low of 3.09% of GDP in 1999 during Clinton’s second to last year in office. Again, spending ballooned as a percent of GDP during George W Bush’s Presidency after the 9/11 attacks, but then started to decline again after Obama came into office. While total dollar-spending surged after Trump came into office, as a share of the economy, the increase looks much more subdued.
In terms of the current US geo-political picture, it’s hard to remember a time when more fires were smoldering around the world, so you would think that it would be a great time for defense contractors. Based on the performance of the largest US defense contractors over the last year, though, that has hardly been the case. The chart below shows the one-year performance of the five largest defense contractors (market cap greater than $50 billion), and during that time, TransDigm (TDG) is the only one that is outperforming the S&P 500. Of the remaining four, two are up less than 4% while Boeing (BA) is down over 5% and RTX is down over 13%. BA is facing its own issues as the company tries to get its act together, but for the other companies rising geo-political instability hasn’t necessarily been good for their stocks.
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The Most Shorted Names Suffer
Equities have generally been consolidating to start out 2024, but one group that has gotten outright punished is those stocks that possess the highest levels of short interest. In the chart below we’ve broken the large-cap Russell 1,000 into deciles (10 groups of 100 stocks each) sorted by the stocks with the highest to lowest short interest as a percent of equity float as of the end of last year and show each group’s average performance year to date. Whereas the average stock in the index is down 2.34% so far this year, the 100 stocks in the index with the highest short interest levels are already down 8.76%. That is significantly more than the second most heavily shorted decile which has averaged a decline of only 2.81%. Notably, the decile of least shorted stocks is actually up 0.41% so far this year on average.
Looking more closely at the decile of most heavily shorted stocks, it’s filled with names that have already fallen in excess of 20-30% YTD like EV-related names Lucid (LCID), Chargepoint (CHPT), and Plug Power (PLUG). Solar stocks like Sunrun (RUN), crypto adjacent names like Coinbase (COIN), and meme stock mania names like AMC Entertainment (AMC) and GameStop (GME) also find themselves on this list and have already seen double digit declines year to date.
The most recent short interest data through the end of last year was released just last week. Below we show the average reading for each industry in the Russell 1,000. Across the whole of the index, the average stock has 3.87% of float shorted. Readings are close to or more than double that for Discretionary Retail and Autos at 9.1% and 7.6%, respectively. Media & Entertainment, Transportation, and Consumer Services are the only other sectors that average more than 5% of float shorted. Meanwhile, Insurance, Utilities, Banks, and Commercial and Professional Services are some of the least shorted industries.
As previously mentioned, some of the worst performing stocks this year have been those with the highest levels of short interest. In the table below, we show the 30 Russell 1,000 stocks that currently have the highest short interest as a percentage of float. Recent IPO Maplebear, or Instacart (CART), tops the list with almost 29% short. That is actually down versus the mid-December reading though back then it was again higher than any other Russell 1,000 member. There are seven other names with more than a quarter of float shorted: Sirius XM (SIRI), Plug Power (PLUG), Lucid (LCID), Kohl’s (KSS), Medicap Properties (MPW), Birkenstock (BIRK), and Celsius (CELH). One thing that is notable is that while many of these highly shorted stocks are underperforming, some exceptions are those that have more recently IPO’d. For example, CART, BIRK, and CAVA are some of the few from this list that are up on the year. Granted, their gains are not nearly as solid of Celsius (CELH) which has completely distanced itself from the rest of the pack, rising 11.4%.
Empire Collapses In Spite of Expectations
The economic data slate was light to kick off the holiday-shortened week with the only release of note being the NY Fed’s Empire State Manufacturing Survey. The report came in catastrophically worse than forecasted. Forecasts were calling for the index to improve from a reading of -14.5 in December up to -5 this month. Instead, the headline reading collapsed down to -43.7. As shown in the chart below, that’s the lowest level since the spring of 2020 and before that, there was never a lower reading in the 20+ year history of the survey.
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Taking a look under the hood, below we show a breakdown of each category of the report as well as its reading the previous month, the month-over-month change, and how those rank (as a percentile) versus all months of the survey’s history. Obviously, with only a couple of months with lower readings, the headline number is in the bottom 1% of all readings on record. The same goes for New Orders and Shipments which were the key drivers of weakness this month. Additionally, it is worth noting that each of those categories was already sitting at historically contractionary levels (ranking in or close to the bottom deciles of their respective historical ranges) in December. While the month-over-month decline was much smaller in January, Unfilled Orders is also down near record lows. That is not to say all areas of this month’s report deteriorated. Delivery Times, Prices Paid, and Number of Employees each rose month over month as did nearly all categories for six-month expectations.
Again, the two biggest declines in January were New Orders and Shipments. Like the headline number, the only period with lower readings was the spring of 2020. The fresh low in Unfilled Orders has surpassed the onset of the pandemic for the lowest reading since November 2010. Inventories are not exactly strong with the current level also in contraction, however, that category is much more elevated than others, currently ranking in the 30th percentile.
As previously noted, while current condition indices have collapsed, the same moves have not been observed for expectations. To quantify this dynamic, below we take the spread of each category’s current condition index and expectations index and average across each one. As shown, the January reading dropped significantly and is now at historic lows. Again the only comparable lows to draw from were early on in the pandemic as well as late 2001, only a few months into the survey’s history. That means New York area manufacturers have observed a material and significant slowdown in their businesses, but that has yet to show any impact on the level of optimism looking forward.
Bespoke’s Morning Lineup – 1/16/24 – Empire Crushed
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“The fault lies not with the mob, who demands nonsense, but with those who do not know how to produce anything else.” – Miguel de Cervantes, Don Quixote
Below is a snippet of commentary from today’s Morning Lineup. Start a two-week trial to Bespoke Premium to view the full report.
Futures are poised for a negative start to the US week as European and Asian equities generally traded lower while US markets were closed yesterday. Oil prices along with interest rates have been moving higher this morning, but the Empire Manufacturing report for January which was just released came in significantly weaker than expected, and that could help to keep a lid on rates. While economists were forecasting the headline reading to come in at around -3, the actual reading was much weaker falling to -43.70. Just to put some perspective on that number, the only time it was lower was during the depths of the Covid lockdowns in early 2020, and the only time the report missed expectations by a wider margin was in April 2020.
Atlanta Fed President Bostic was interviewed in the FT over the weekend, and he suggested that any potential rate cuts from the Fed would be unlikely until at least the summer. That has let some air out of the rate cut pricing balloon this morning relative to last Friday (blue vs yellow bars below), but only by a little bit. In the short-term, markets are pricing in 1.8 25 bps rate cuts between now and the May 1st meeting which is slightly less than where things stood at the January meeting but still well above where the market was at the end of October.
Longer-term, pricing of cuts remains aggressive with 6.4 25 bps cuts priced in between now and the 12/18/24 meeting. That’s down from 6.7 last Friday but still slightly above where things stood at the end of last year and well above the 5.9 cuts that were priced in as of December.
Bostic is a voting member of the FOMC this year, so his comments certainly carry weight and looking ahead, investors will be focused on a speech today at 11 AM Eastern where he will be speaking at the Brookings Institution on his economic and policy outlook. Back in November, Waller commented that he was confident that Fed policy was well positioned to slow the economy and get inflation back down to its 2% target and even envisioned a scenario where the Fed could be cutting rates within the next three to five months.
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Bespoke’s Brunch Reads – 1/14/24
Welcome to Bespoke Brunch Reads — a linkfest of the favorite things we read over the past week. The links are mostly market-related, but there are some other interesting subjects covered as well. We hope you enjoy the food for thought as a supplement to the research we provide you during the week.
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On This Day in History:
Miracle on the Hudson: We’re one day off but it’s a long weekend and Monday marks fifteen years since the Miracle on the Hudson on January 15, 2009. Shortly after takeoff, US Airways Flight 1549 had its engines disabled after a bird strike, forcing an emergency landing on the Hudson River in New York City. Captain Chesley “Sully” Sullenberger and First Officer Jeffrey Skiles determined that they didn’t have enough speed or altitude to make it back to the airport, making the cold Hudson the only option. The heroic actions and quick decision-making under a world of pressure saved the lives of all 155 people on board. Since the crash in 2009, a movie was made about the event in 2016. It’s titled “Sully” and stars Tom Hanks as Captain Sully.
Investments
ETFs in 2023: A Tale of Success and Failure (Morningstar)
The ETF market experienced substantial growth in 2023, with significant inflows and more than 500 new launches. As a result of strong competition, though, there were almost 250 closures. Many of these were linked to factors like low assets, high fees, and poor performance. Commodities-focused ETFs had the highest number of closures, along with closures in leveraged equity ETFs and active ETFs. [Link]
Hedge Funds’ Popularity Flags Among Allocators, per Consulting Firm (Chief Investment Officer)
Hedge funds are losing their popularity according to Agecroft Partners. Despite growth in hedge fund assets, investment inflows are slowing, with smaller and midsize funds outperforming larger ones. For some time, hedge fund returns have been in the single digits along with higher fees. The overall hedge fund industry is predicted to experience consolidation, with stronger managers attracting more investments and underperforming ones facing potential closure. [Link]
AI & Technology
This iPhone fell out of Alaska Airlines Flight 1282 (The Verge)
At this point, most of us have seen the video of the Alaska Airlines Flight that lost part of its fuselage shortly after takeoff. If you haven’t, this link has a clip of it embedded in the article! The incident, involving a Boeing 737 Max 9, led to an emergency landing at Portland International Airport. The National Transportation Safety Board confirmed two phones from the flight were found on the ground, including one that survived the fall to Earth! Pretty crazy to think about when some of us have dropped and cracked phones from just a few feet. [Link]
New material found by AI could reduce lithium use in batteries (BBC)
Microsoft and the Pacific Northwest National Laboratory, with the help of AI, discovered a new material that could reduce lithium usage in batteries by up to 70%. AI screened through tens of millions of materials in less than a week to identify candidates for the job. Once AI could identify qualifying materials, it took less than nine months to develop a battery prototype. The material called N2116 has the potential to be a sustainable energy storage solution because it’s safer than lithium. The quick AI finding is also beneficial because of the lithium shortage that could occur in just a year. [Link]
California wants to reduce traffic. The Newsom administration thinks AI can help (Los Angeles Times)
The California Department of Transportation is exploring the use of AI to reduce traffic, not just for the cars jammed up in LA and other dense cities, but also for pedestrians and cyclists. AI would be employed to analyze data from traffic sensors and cameras. The technology would be able to identify narrow roads, frequent site crashes, dimly lit areas, and other factors that clog up traffic and lead to more accidents and then present solutions to those problems. [Link]
Our fingerprints may not be unique, claims AI (BBC)
Columbia University is challenging the belief that every fingerprint is unique with the help of AI to analyze 60,000 prints. With 75-90% accuracy, AI could identify whether different fingerprints belonged to the same individual. There are some issues with the research though, as the methods used by AI aren’t fully understood due to untraditional analysis. If this research continues to develop, AI could have implications in biometrics and forensics. [Link]
How AI Replaced the Metaverse as Zuckerberg’s Top Priority (Bloomberg)
Since starting Facebook at Harvard in the early 2000s, the CEO of Meta Platforms, Mark Zuckerberg, has seen a fair share of technological changes. Perhaps the development of AI is the biggest evolution yet, and Meta’s AI research group is now focusing more on developing consumer-facing AI products. The company’s strategy includes leveraging AI to enhance user engagement on its platforms. After the launch of ChatGPT, which has quickly accelerated public interest in AI, Zuckerberg has shifted focus from the Metaverse to AI-driven initiatives. [Link]
Environment & Energy
America’s Carbon Emissions Fell for the First Time Since Covid (Heatmap News)
In 2023, the United States saw a 1.9% decrease in greenhouse gas emissions even as the economy grew. That marks the first time this decade that economic growth and emission reduction occurred simultaneously. The decline in emissions was driven mainly by the power sector, with notable reductions in coal usage and increases in solar and nuclear power. However, transportation and industrial sectors still present challenges, with rising emissions in air travel and heavy industries. [Link]
A huge battery has replaced Hawaii’s last coal plant (Canary Media)
In 2022, Hawaii shut down its last coal plant and replaced it with the Kapolei Energy Storage system, featuring 158 Tesla Megapacks. The project boasts 185 megawatts of discharge capacity, providing crucial grid services like capacity, energy storage, and frequency stabilization. The battery’s integration aids in maintaining grid reliability while transitioning to renewable energy, marking a significant step in Hawaii’s commitment to a clean-energy grid. [Link]
Marketing
How Pop-Tarts pulled off its unforgettable mascot sacrifice (Marketing Brew)
Pop-Tarts made a bold marketing move just before the new year, ending 2023 with a bang. After Kansas State’s 29-19 win over North Carolina State in the Pop-Tarts Bowl game, a Strawberry Pop-Tarts mascot climbed into a massive toaster before spitting out an equally large and edible Pop-Tart for the victors to feast on. It was certainly an unconventional marketing tactic playing to its “crazy good” mantra. It ended up being a big success, as internet memes and discussion boosted viewership and turned the stunt into the brand’s biggest earned campaign. [Link]
Back to Work?
Offices Around America Hit a New Vacancy Record (WSJ)
Office vacancies in major US cities have reached their highest levels in over four decades, tracing back to overbuilding in the 1980s and 1990s, worsened by the shift towards remote work and smaller office spaces accelerated by the pandemic. Many of the vacancy trends have flipped too. For example, areas that were once booming like San Francisco and Texas cities are now facing high vacancy rates, while cities in Florida that once struggled now show lower rates. [Link]
Soccer Stumbles
Chinese Remains Terrible at Soccer. It Says This Is Why. (WSJ)
Corruption is Xi Jinping’s explanation of China’s soccer struggles. The Chinese government has revealed that high-profile figures in the country have been involved in bribery and match-fixing. Li Tie is one star player turned coach who admitted to manipulating the outcome of games in exchange for money. With such a large population, of which many are fans of the sport, it’s hard to imagine that a country of its size wouldn’t be able to put together a solid team. The corruption involved sounds like it might be a smaller byproduct of larger issues like government policy and business models within the country and world of sport. [Link]
Government Programs & Policies
The Fed Launched a Bank Rescue Program Last Year. Now, Banks Are Gaming It. (WSJ)
The Federal Reserve’s emergency lending program, created during the 2023 banking crisis, has unexpectedly turned into a profitable opportunity for banks. With the market anticipating multiple Fed rate cuts, banks are able to borrow from the Fed’s program at lower rates and earn higher returns by depositing these funds with the central bank. Initially, the program provided costly loans due to expected higher rates, but the recent reversal in rate expectations made borrowing cheaper. [Link]
Maine renews effort to elect president by national popular vote (Daily Kos)
Maine is a state that divides its electoral votes: two for the statewide winner and one each for the winners in its congressional districts. Democrats in the state are now revisiting a bill to join the National Popular Vote Interstate Compact and allocate Maine’s four electoral college votes to the national popular vote winner. All member states would collectively award their electoral votes to the winner of the national popular vote and will only take effect when states representing a majority of the 538 electoral votes join, which means 270 or more votes. The goal would be to ensure that the winner of the popular vote becomes president. The popular vote winner has lost the Electoral College five times in US history, the most recent being Hillary Clinton vs Donald Trump. [Link]
IRS collects more than $500 million in back taxes from delinquent millionaires (MarketWatch)
Millionaires with outstanding tax debts have paid $520 million to the IRS following increased enforcement efforts geared toward wealthy businesses and individuals. Now that the IRS has received a big funding boost from the Inflation Reduction Act, the agency can enhance compliance which is already having success. The crackdown could be hindered by a deal to lift the debt ceiling or a potential deal to avert an upcoming government shutdown, both of which would redirect billions of dollars of funding elsewhere. [Link]
Secret Societies
Skull and Bones and Equity and Inclusion (The Atlantic)
In 2019, members of Yale’s secret society Skull and Bones, known for its elite and exclusive history, confronted its legacy of exclusion by replacing traditional portraits in their meeting place with signs criticizing the society’s lack of diversity. This act reflected broader changes within Yale’s secret societies, which historically have been symbols of privilege and exclusivity. To give you an idea of the exclusivity here, the Vanderbilts, Rockefellers, US presidents, and other high-profile figures have all been bonesmen. The societies now are increasingly diverse, with members advocating for social justice and inclusivity, which has raised tensions between those focused on progress and alumni who value tradition. [Link]
Tails Never Fails?
Scientists Destroy Illusion That Coin Toss Flips Are 50–50 (Scientific American)
After more than 350,000 coin flips, a study found that coins landed on the same side as they started 50.8% of the time, indicating a nearly 1% bias. This finding supports the theory that coins don’t rotate symmetrically in the air, meaning that they spend more time in the air with their initial side facing up. However, for everyday decisions, this bias is negligible, and standard coin flips can still be considered virtually random. If you can see the coin before it’s flipped, though, it sounds like the side facing up might be the one you should go with, instead of the favored “tails never fails” strategy. [Link]
Race Against Rats
A New York Professor Wages Epic Battle Against Rats Attacking His Car (WSJ)
A theater professor at the City University of New York has been unlucky enough to experience four rat invasions of his car in New York City, which is known for its large rat population. The professor has used some creative tactics to combat the rats, like wrapping ignition wires in minty tape and pouring a “garlic-scented potion” on his engine. It’s an issue many are having, with more than 91,700 car damage claims due to rodents in the US from July 2022 to the end of June 2023. The search for effective deterrents is ongoing, and many more interesting methods are being tested. [Link]
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Have a great weekend!
The Bespoke Report — 1/12/24
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Nat Gas All Over The Place
Even for a commodity like natural gas, the last three months have been incredibly volatile. Think about this; over the last month, front-month natural gas futures are up over 40%, but over the last three months, they’re actually down. A 40% rally and it’s still in the red over the last three months. Incredible.
Below we show the one-month rate of change in natural gas over time, and anything over the red line indicates a rally of more than 30%. While there have been plenty of other periods where natural gas rallied a lot more than it has over the last month, the recent move ranks as the largest since late 2022. It’s also a far cry from where the market was a year ago when the commodity was in the middle of its largest ever one-month decline (-52.4%).
The scatter chart below compares rolling one-month moves in natural gas to rolling three-month returns. As you would expect, the relationship is positively correlated- if natural gas is up over the last three months, it’s probably also up over the last month and vice versa. That’s what makes the current performance stick out so much. In the chart below, we have drawn a red box around all the different occurrences where nat gas rallied at least 30% in a month but was down over the prior three months, and there weren’t many.
In the long-term chart of natural gas below, we have included red dots for each of those occurrences when it was up at least 30% in the prior month but down over the prior three months. While there were sporadic occurrences from the late 1990s through 2012, there was nearly a ten-year lull from May 2012 up until 2022 at which point there have been several additional occurrences.
In terms of performance following these periods of extreme divergences between one and three-month returns in natural gas, overall, there hasn’t been much of a clear trend. Before the three most recent occurrences since the start of 2022, the commodity’s performance was generally positive going forward. In the three most recent occurrences, though, natural gas experienced declines of over 40% each time.
Just to illustrate once again how volatile natural gas is, check out the performance following the January 2022 occurrence. While natural gas was up nearly 70% after six months, a year later it was down 44.9% for an overall performance shift of over 110 percentage points!
