Financial Professionals


Moving Energy To Market Weight From Overweight

Spot oil prices, along with most major commodities, have experienced precipitous declines during the first week of May. 
  1. The U.S. dollar, post ECB meeting, has finally "caught a bid" and looks positioned to challenge the critical resistance price point at 74.170, contributing to the commodity selloff.
  2. Within the energy sector, highly cyclical refiners, drillers, and oil service names have declined the most, emphasizing an adjustment in risk tolerance.
  3. The acceleration in global growth appears to be moderating and risk is being reduced.
Referring back to my second quarter commentary, I wrote the following:
Page one, paragraph 3: "So, how are we doing? Has anything changed over the past quarter? Yes, actually. The "overweight everything" trade is officially over. That easy trade to overweight all risky assets, which historically comes around every 5 to 10 years, ran its course. Look at the first-quarter performance of the S&P 500 and you'll see the market concluded "overweight everything" wasn't the trade anymore in late February when the market started to slip, well before the sell-off that followed Japan's earthquake on March 11."
Page two, paragraph 2: "Right now, energy is the one sector I would continue to overweight, but that view could change."
Given this week's dramatic price action, "the view has changed,"  moving energy to market weight from overweight.  I expect the next allocation change in energy will be to raise risk from market weight back to overweight.  Let me be clear that  given the benign nature of the VIX, outstanding corporate earnings and guidance this quarter, I do not believe this is the peak for the S&P 500 in 2011, but rather a pause that refreshes.
Referring again back to my commentary, I closed with the following:
"Every quarter investors need to revisit their market expectations. What we expected last quarter may no longer apply. It's important to ask, what could go wrong? I've given you a few ideas of what I'll be watching out for.
Ben Bernanke's QE2 easy-as-they-come, "everything overweight" trade has ended. It doesn't mean that markets go lower. We should position ourselves not for significant price appreciation but for more of a mean reversion where the market appreciates in more historic fashion. Instead of riding the express elevator up, investors should expect to walk the winding stairs."
My summary expectations remain unchanged.

CRB QE2 TAILWIND August 05 - Present

Source: Bloomberg

Spot Oil Futures Year to Date

Source: Bloomberg

Past performance is not a guarantee of future results.

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.