Inflation & Crude Oil

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According to the CFTC's Disaggregated Commitments of Traders - Options and Futures Combined report, COT as of Tuesday, May 11 "Managed Money" including commodity trading advisors (CTAs), commodity pool operators (CPOs), such as commodity ETF managers, and “hedge funds” have reduced their collective net long position as a percentage of open interest from 14.43% on July 21 of last year to 11.40%.

This seasonal chart from Barchart shows the current price exceeding the typical pattern since February.

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Joe Ross, a well-known commodity trader, and educator says he goes with the fundamental strength when it conflicts with the seasonal since it means the strong trend has overcome the resistance of the seasonal tendency so the odds favor staying with the trend. 

Supporting the uptrend view this updated Z score chart compares open interest to price since open interest needs to expand to sustain price trends both up and down.

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One more thing, Wednesday IEA said economic recovery and oil demand would exceed output.

"The anticipated supply growth through the rest of the year comes nowhere close to matching our forecast for significantly stronger demand beyond the second quarter,'' the IEA said in its monthly report, citing increased OPEC+ production, but revised down its forecast for 2021 by 270K bpd due to lower demand.

Strategy

In bull markets, a good strategy is to stay long equities and/or ETFs and then tactically hedge pullbacks as they begin developing since ordinary pullbacks can become corrections when something unexpected happens. Then corrections can become downturns when something else unexpected happens, and downturns can become bear markets when many unexpected things change medium and long-term fundamentals.

Last week's CPI inflation-induced pullback appears to have ended last Friday.

After all the slicing and dicing of the CPI report advocates of the transitory view seem to prevail as the equity markets just shrugged and resumed advancing. By Thursday, after some reflection it seems the CPI report was not as worrisome as first feared since transient components caused much of the increase, but the core did rise .9%. By Friday, those arguing transitory apparently prevailed.

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Disclaimer: IVolatility.com is not a registered investment adviser and does not offer personalized advice specific to the needs and risk profiles of its readers.Nothing contained in this letter ...

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