The song remains the same. Turn the calendar page, appreciate the blank slate that is the first trading day of the year. No scars. No hole. Not even a drawdown. Start the year off by taking a swing at long risk.
It’s a junk rally. There are countless ways to illustrate.
Russell 2000 as a proxy for the riskier sections of the market. January not too bad of a month, especially when not on the precipice of a global pandemic.
The junk part? Plenty of ways to spot it. Factors. Volatility and Value (ignoring rather meaningless “Trade Activity”) top factors on the day with Profitability and Momentum the losers.
Volatility factor particularly noteworthy with a robust 2 standard deviation move on the day.
And Profitability with a 2 sigma move to the downside. Who needs profits when you’re chasing risk?
Big move in US10YR yield again reinforces flight from quality. Outlier day in terms of absolute change of yield.
2021 demonstrated a decent relationship between 10YR yield and Energy sector. That relationship holding true today.
What this means for energy is that it’s historically OK to ride a little beta at the beginning of the year; plenty of time to evaluate fundamentals once the buzz wears off.
Not surprisingly, within Energy it’s the OFS subsector leading the charge today.
And the trade on the first day of the year is to buy risk and buy the laggards. OFS was the worst subsector in Energy in 2021.
It’s not the cheapest sector in Energy, but that doesn’t matter right now. Fwd EV/EBITDA by subsector:
We’d rather play a long risk trade via XOP over XLE. The former shows a wider implied skew. XOP skew:
Advocatus Diaboli
There is no shortage of bullish narratives out there, but we keep in mind the following charts that remind us to play Devil’s Advocate.
The sector looks about fairly valued on macro data today. It certainly deviates from our estimate of fair value, but a large gap between expected and actual is not in the cards.
The WTI chart doesn’t scream enthusiasm to us.
The sector has been struggling to outperform the S&P 500 for months.
And Brent/WTI timespreads do not inspire confidence.
Keep it on a short leash.
VR