Bulls make money, bears make money, but…

At Tricio we like to look at charts in order to gauge market sentiment and investor behaviour. A familiar saying that I first heard in the 1980’s from clients in the Chicago futures pits was that ‘bulls make money, bears make money but pigs get slaughtered’. This makes sense as futures markets can trend nicely, until they reverse. Having some sort of risk control and trading system in place can be helpful in order to avoid being a ‘pig’ and trying to ride a trend and hold the position even after the underlying trend reverses.

A colleague on a model trading desk (these days it would be called a quantitative trading desk) used to always say that every model should not just have a ‘stop-loss’ risk control part to it, but should have a ‘take profit’ element to it as well. This runs counter to the notion that you should gear up and pyramid positions if they move in your favour forever. But it does potentially increase the potential longevity of your trading career to book profits now and then as part of your trading system.

The US war in Iran rewarded equity funds and wealth managers that had exposure to energy producers. Before the war the sector (using the SPDR XLE fund as a proxy for US names) had recovered all of the ground lost during COVID. Some bullish hopes were building as AI datacentre demand was seen as a big user of energy, but a global oversupply of crude was seen as keeping oil prices range bound at best, with downside risk building. The outbreak of the war saw crude prices balloon to multi-year highs (which we have covered in previous blogs), and lifted XLE to new all-time highs. Will the shift to new highs in XLE extend further or will the fund revert back to the previous trading range?

Near term price gains could clearly extend further if the war heats up again and/or lasts a lot longer. But as the long-term chart below (weekly, semi-log with 13 and 50-week moving averages) shows, previous big rallies have eventually reversed course. Odds are that this rally in XLE will at some point in the future see prices drop back into the previous range.

Timing peaks and turning points can be tricky. For long-term investors and fund managers we would suggest that they look to rebalance their holdings at some point over the coming weeks as their allocation to energy holdings will have ballooned relative to their previous weight in their portfolio. From a technical point of view, watch the 13-week moving average as losing touch with this average (a full weekly bar below it) would suggest that the trend is turning. The 50-week moving average is below the previous range top (top purple line) so using the line as a hard ‘the trend has turned’ level may be more attractive than using the moving average as risk. A bear cross of the XLE price falling below the 13-week moving average and the 13-week moving average moving below the 50-week moving average would confirm a bear trend. No need to hang around to take some profits until this is seen, right?

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Gerry Celaya

Chief Strategist