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Long US Stocks, Long Crude Oil – Delta Variant Remains the Wall of Worry – Q4 Top Trades

Long US Stocks, Long Crude Oil – Delta Variant Remains the Wall of Worry – Q4 Top Trades

Christopher Vecchio, CFA,
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The story for 4Q’21 remains similar to that entering the past two quarters. Central banks continue to provide substantial stimulus even as pandemic-era efforts begin to winddown. Governments in Western economies continue to run historically high deficits. Vaccination rates continue to rise, and thanks to the high efficacy of existing vaccines coupled with booster shots coming suggest that the delta variant is still a ‘wall of worry’ for markets to scale in the final months of 2021.

US S&P 500 (SPX) TECHNICAL ANALYSIS: DAILY CHART (February 2020 to September 2021) (CHART 1)

The long US equities story may soon get back on track as the Federal Reserve continues to push the perception that price pressures are transitory and labor markets are healing, papering over supply chain issues as corporate earnings remain robust. A bout of volatility in September produced an insignificant pullback from all-time highs, which in both the US S&P 500 and the US NASDAQ 100 remains above our 3Q’21 targets (the former was targeting 4350; the latter was targeting 15220). The US S&P 500, back above its 50-SMA, may soon be tracking the uptrend originating at the November 2020 low (dotted line on chart 1), which could see prices rise above 4800 before the end of the year.

CRUDE OIL (US OIL) TECHNICAL ANALYSIS: DAILY CHART (September 2019 to September 2021) (CHART 2)

Coming into 3Q’21 it was noted that “while the long copper/short gold pair trade still makes sense thematically, there is an argument to be made that recent shifts in the fundamental backdrop for copper make it a less viable vehicle to express a pure growth view.” The shift in the backdrop? The news out of China regarding Evergrande and the country’s heavily indebted property development sector.

Instead, a purer growth view revolving around crude oil may be the more favorable setup. Historically, crude oil demand tracks global growth with a near-perfect correlation (+0.97 on quarterly basis over the past 30-years), so as long as the bull case for global growth remains, then energy should be in strong demand. Having now broken triangle resistance dating back to its July 2020 (and yearly) high, it looks like crude oil prices are resuming their uptrend and set to rally perhaps has high as 87.21 (23.6% Fibonacci extension of November 2020/July 2021 range).

--- Written by Christopher Vecchio, CFA, Senior Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.