As I look forward into 2021, I want to paint a broad picture of what to look for directionally, as well as key turning points to be aware of. I will focus on the two main trades I am most excited about, SPX and crude oil. As we examine the below charts and analogs, consider them as a rough guide, using crayon not pencil.
Let’s begin by taking a look at the broader market via SPX. To gain a big picture forecast view of SPX I prefer to utilize the 10 year crude oil to SPX analog. This analog was discovered by Tom McClellan, and looks back to see what crude oil was doing ten years ago to give us a glimpse of what to expect with the broader market now. A note on this analog, and the other analogs I will discuss in this post; they will look to show you direction and key turning points to be on the lookout for. They do not reflect the magnitude of the move to expect.
So how did crude oil perform 10 years ago in 2011? Below is the chart of /CL for 2011. There was weakness to begin the year, followed by a large bullish run higher to a final top in April/May. This was followed by a large, sustained bearish decline into the fall. The year ended with a bullish advance.
When I look at this analog, and look for how I might use it in 2021, I look for:
- When to be on the lookout for key turning points
- Areas I want to slam the gas down
- Areas I want to begin to pull back on exposure and/or hedge
- Areas I want to short aggressively
To open 2021, I will look to be cautious. The market is already extended, and in need of a pullback. This can be seen by some historic put/call ratios. Pairing back exposure to start the year seems prudent, as well as shorting the market if/when it begins to turn down in January.
As we move into late January, I will be looking to take profits on any hedges/shorts, and begin to position myself for what should be an aggressive advance higher. February – April should be an excellent time to be long the market, for what could be a final blowoff top.
May – September could be the kind of move bears have been craving. While I do not have a read on the magnitude of the move to expect, the analog is telling us to expect significant, sustained weakness for over five months. If SPX shows us a spring blowoff top, this bearish move that follows could be a very profitable one for the bears. As we move into mid-late April, I will be looking to position myself for this decline.
The year is then forecasted to end with a nice bounce back higher in October/November to retrace some of the decline into year end. Look for any big decline in September as opportunities to take profits on short positions, and begin to position yourself for the bounce into year end.
Crude Oil Forecast
If you asked me what single area of the market I am most excited about for 2021, it would certainly be the oil market. You can reference my 2020 article “Striking Oil” to see some of the longer term fundamental reasons behind a budding bull market in crude. However, for this article let’s focus on the prospects of 2021 alone.
Another analog that I am Tom McClellan both use is the gold to crude oil analog, which works on a 20 month lag time. What gold was doing twenty months ago should give us directional clues as to what crude oil will be doing now. So what was gold doing twenty months ago? Below is a chart of GLD from May 2019 – April 2020.
As you can see, it was a good time to be long gold, and I expect 2021 will be an excellent time to be long crude oil, as well as oil companies and MLPs. If you look closer at the chart you will notice it rhymes nicely with some of the expected moves in the crude oil/SPX analog. Look for a flat to up January for /CL, followed by a very substantial rise into an April top. After a mid-year consolidation, I expect to see crude oil closing 2021 at the highs for the year. I expect this to be a year where energy outperforms the broader market.
As we wrap up 2020, in closing I will say 2020 was wild year, but a highly profitable year. The severity of the March Covid crash was unexpected, but the intensity and duration of the recovery that followed led to the bulk of my gains for the year. My expectation for the recovery we saw in /ES from April-Dec was founded on the level to which /ES had become oversold, the intensity of the Federal Reserve’s QE response, and the 10 year /CL analog.
So, what are some of the fundamental themes to be on the lookout for in 2021 that will influence the market? I’ll close with these, and will look to explore them further in the new year. Here’s to a prosperous 2021!
- Fed policy. Does the Fed look to taper QE before it expands it again?
- The launch of China’s digital currency
- Middle East escalations with Iran effecting oil prices?
- Continuing escalating U.S. fiscal stimulus and spending
- Federal Reserve direct deposits to Americans?